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Daniel Bases

Mixed views on Russia's business climate

Tuesday March 20, 10:40 am Eastern Time

HARRIMAN, N.Y. (Reuters) - Economists bemoan its troubling economic trends, while bankers lament a lack of restructuring, but executives working in Russia say Vladimir Putin's first year as president was a breath of fresh air.

"At least from a business standpoint, we are seeing tremendous improvement," in operating conditions, "and a normal restoration of solid law and order," said Shiv Khemka, chief executive officer of private equity fund SUN Capital Partners.

Khemka was among the academics, executives and politicians attending the 24th annual Arden House Conference on American-Russian Relations in Harriman, N.Y., sponsored by Columbia and Harvard Universities.

"What is happening is a natural swing back of the pendulum from the capitalism run amok under (former Russian President Boris) Yeltsin to a situation which may swing it toward a bit too much control, but that is slightly inevitable because it will swing back and forth a few times before Russia stabilizes," Khemka, whose family has done business in Russia since 1958, said in an interview.

In the 12 months since his election, Putin has achieved limited tax reform, methodically consolidated political power and left participants in the weekend conference split on whether his policies tread too heavily on individual freedoms.

Grigory Yavlinsky, leader of Russia's liberal Yabloko party and member of the lower house of parliament, or Duma, told the conference that the stable business environment doesn't outweigh concerns about Putin's "very strong tendencies in creating some kind of corporate system" that could impinge on individual freedoms.

"There is a very clear feeling that the authorities are absolutely not prepared for any kind of internal criticism in the country," he said.

Yavlinsky cited attacks on the press and called the prosecution of Vladimir Gusinsky, head of the leading independent media group MediaMost, politically motivated.

However, Dmitri Yakushkin, adviser to the chief of Putin's administration, Alexander Voloshin, dismissed Yavlinsky's take on both Gusinsky, calling it a "business matter," and the "corporate state" theory.

Unfortunately Russia "is either absolutely chaotic, or you have the other tendency" to introduce discipline, only it "starts spreading and controlling everything," Yakushkin said in an interview.

Philip Wegh, an operations director for Philip Morris Cos.' (NYSE:MO - news) Kraft Foods unit near St. Petersburg, said in an interview Putin's crackdown on customs agent bribes vindicated a company decision to invest in a coffee-packaging plant.

"So long as gray imports were condoned it was hard to justify manufacturing investments in Russia. Because customs duties are being enforced it is now hurting competitors that didn't make any investment at all in Russia," said Wegh.

Wegh said revenues for Kraft's Russian operations in 2001 should hit pre-crisis levels of between $30 million and $40 million.

ECONOMISTS DOUR, BANKERS FRUSTRATED

Economists at the conference threw cold water on the optimistic view for Russia's economy, saying strong oil prices and the lingering effect of a 1998 rouble devaluation that slashed domestic production costs, caused the gross domestic product to surge 7.7 percent in 2000.

Growth of GDP for 2001 is forecast between 4 percent and 5 percent.

Columbia University economist Richard Ericson, speaking at the conference, said a new tax code passed last year could not make up for an estimated $25 billion in capital flight in 2000 and that "a good bit of the Russian economy remains substantially unreformed." On Monday, Putin's government said it would submit further measures for streamlining the tax system to the Duma.

Judging by their nods, bankers at the conference agreed with the economists, later citing a lack of reforms to their industry, which they called largely non-transparent, poorly regulated and too small to sustain capital investment in Russian industry.

Reform measures such as ridding the system of insolvent banks, forcing consolidation and tightening of capital adequacy laws are under discussion, "but there is no broad consensus yet on implementation," said Joshua Larson, chief operating officer for Morgan Stanley Dean Witter's Moscow office.

High commodity prices improved bank balance sheets in 2000, but the same bankers who presided during the 1998 crisis are still in place, Larson said, adding the "lack of any real threat of bankruptcy...does not instill a healthy dose of fear that will force bankers to moderate their risky behavior."



See also:

Conference Debates Putin's Vision
Associated Press, Steve Gutterman, March 19, 2001

Grigory Yavlinsky will participate in the annual joint conference of Harvard University and Columbia University, USA, press-release, March 16, 2001

Tuesday March 20, 10:40 am Eastern Time

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