Expert Corner with John Connor: Investor attitudes improving

Occasionally, Modern Russia will speak to industry experts and analysts to get their views on Russia’s modernization efforts. To launch the series, Modern Russia spoke with John Connor, founder and portfolio manager of the Third Millennium Russia Fund and longtime Russia watcher, who gave his impressions coming out of the 2010 St. Petersburg International Economic Forum and President Medvedev’s June visit to the United States. 

What was the atmosphere like at this year’s St. Petersburg International Economic Forum (SPIEF)?

You just cannot help but start any conversation about this year’s SPIEF with “the weather.” St Petersburg, Russia, is an increasingly pristine (read: “restored”) Old Europe venue which would be a great destination for any conference but the weather can be “iffy.” This year, the sky was blue, bright and sunny and it certainly helped create an upbeat atmosphere for world business and government leaders as they gathered.

Substantively, although the world economy remains in a dangerous place, there was definitely a constructive and positive approach to consideration of the challenges we face. The high level of attendees from Fortune 500 CEO’s to government ministers and heads of state contributed to the overall serious tenor of the Forum’s discussions. I left with the impression that I had just participated in “Davos East.”
 
What do you think about government proposals that were recently announced geared to foreign investors, like abolishing the capital gains tax for long-term investment and providing incentives to innovation companies?

These are important initiatives. In fact, when he came to this part of his presentation in St. Petersburg, President Dmitry Medvedev received a hearty round of applause from the participants. But, as with any proposals, we need to see how quickly they are implemented and what the specifics are.

Do you think foreign investors should look at Russia through new lenses?  If so, why?

I have been an investor in Russia for a long time now. Before launching the Third Millennium Russia Fund (TMRFX) in 1998, I ran a life insurance company started in 1993 (ROSGAL, or Great American Life of Russia) and was involved in the start-up of the primary Internet portal in Russia, mail.ru. I have long thought that, given consolidated, fully audited public companies which pay their taxes and deal forthrightly with public investors, Russia got a bad rap and the “Russia discount” was too high. Attitudes towards investment in Russia by foreign, portfolio investors are slowly improving, as they should. Foreign direct investment has been increasing for some time now, although Poland, for example, gets more. There is still a long way to go for Russia to reach its full potential as an investment target.

What do you think about the foreign investment deals that were announced in St. Petersburg, Silicon Valley and Washington?
      
Very positive moves by some of the world’s leading companies. A real vote of confidence for Russia’s bright future and its growing middle class.

What is appealing about investing in Russia now? What’s different to when you first began working in Russia?
      
Many things are different but some remain the same. At the top, there is clearly an understanding that, if Russia is to develop as far and as fast as any conscientious leadership would wish, foreign investment must play an increasingly important role. Personally, I judge leadership at the top in the Russian Federation, as far as development of business and market forces, to be very positive.
   
But there are groups that “don’t get it.” Bureaucracy in Russia has historic roots pre-dating communism and it is simply too big and much too intrusive. It is disquieting that polls show too many young Russians want to go into government service to make money through bribes and have an easy life. The other group that is an obstacle: the so-called “oligarchs.” These business interests are anti-competitive; have carved up the Russian economy for their own self interest and do not seem to care about the national interest of Russia and its people, overall.

Personally, if Russia can finally enter the WTO – after 17 years of negotiations! – I think that will go part way to better integrating the Russian Federation into the rules-based world trade system and heighten competition at home in the Russian economy. This, of course, is why the oligarchs have been among the foot draggers.

On a positive note, President Medvedev has publically acknowledged these challenges and is seeking to remedy the situation. We need to see how his campaign for modernization turns out.

What are the key sectors that investors in Russia should be looking at now? What are the prime opportunities for growth? Why?
       
Consumer-related businesses catering to the rising middle class, reflecting rising per-capita income levels. Agribusinesses, especially in the Black Earth region – for the same reason. Not just grains and commodity crops, but fancy fruits and vegetables, again in the south. Longer term, vacation real estate in the south and Black Sea areas (think of the migrations southeast and southwest in the U.S.).

Infrastructure projects are a possibility and certainly the need is great and doing project finance is a great use of foreign capital and this is understood at the top. BUT, I am not sure the leadership buys into the need for roads (toll roads, at least for the first 20-30 years) since there is so much reliance on rail. Personally, I believe increasing auto ownership (Russia will soon be the biggest car market in Europe) does require safe, efficient, modern highways and tourism and travel are the world’s biggest industries. But, the leadership may still betray a communist-era bias against such “frivolities” and not see travel inside Russia as a mandate. I do.

What key challenges remain, and how can they be overcome? Is Russia willing to work with foreign investors to overcome those challenges?
       
When you think of all the problems we face in the United States, where we have a very high standard of living, the problems faced in the Russian Federation are even more. But living standards are rising rapidly in Russia and there is an appreciation that reliance on commodity exports has to be supplemented by more innovation and use of Russia’s tremendous human resources. The high educational levels and fantastic Russian culture portend all kinds of future achievements. Leadership from the top is critical and state sponsorship, properly moderated, can help launch many new businesses (think of the internet in the U.S.).

But, long term, hopefully, young Russians will come to appreciate the joys of entrepreneurship and starting up small and medium sized businesses. There is a theoretical appreciation of SMEs at the top, but bureaucratic barriers are tough to overcome and financing may be a problem. Whether Russia can become a truly innovative business culture remains to be seen. Let’s hope so.