Analysis: Mixed Messages for Investors as Russia Goes 'From Horrible to Bad' ; the Risks Are Enormous, but So Are the Potential Returns. as Oil Giants Get Their Fingers Burnt, Tim Webb and Abigail Townsend See How Western Companies Can Chart a Path through Corruption and Political Uncertainty
Tim Webb and Abigail Townsend, The Independent on Sunday (London, England)
On Monday, delegates gathered in Westminster for the annual jamboree for Russian business. As usual, it was a slightly chaotic affair at the Russian Economic Forum, with a serious amount of networking going on over brandies in one of the bar areas of the conference centre.
The tone was remarkably upbeat, in contrast to gloomy reports in the media, which have focused on the $1bn (pounds 530m) back-taxes bill for the oil joint venture TNK-BP. This will be no doubt be high on the agenda when BP chief executive Lord Browne meets President Putin this week. The fate of the biggest victim of retrospective tax bills, the fallen Russian oil giant Yukos, will soon be sealed with the sentencing of former chief executive Mikhail Khodorkovsky.
There is still plenty of appetite for investing in Russia because of the potentially high returns. But Charles Hecker, associate director for Russia at Control Risks Group, the business adviser, says Western companies are confused by these mixed messages about the country.
'Some speakers in business conferences come across as extremely enthusiastic and give the impression that the door is wide open,' he says. 'But if I was a businessman, I would find it hard to reconcile these different signals.'
It is his job to evaluate the risk of a proposed business venture, and that varies from sector to sector in such a big country where the rule of law is uneven and the political landscape constantly changes.
'Western businesses have to be very specific about their situation and ask themselves: 'What does this mean for me?',' he says.
Risk is incredibly hard to quantify, and impossible to eliminate. Some Western firms assume that dealing with a far-flung local authority, rather than the central government in Moscow, is easier as it avoids negotiations with the unpredictable Kremlin. But corruption is often more prevalent in local government. While it may be low level, it is a growing problem, particularly for Western businesses, says Mr Hecker. 'Problems happen which we do not hear about. Often, negotiating with the mayor's office in Siberia can be very difficult, for example, and far harder than talking to the Kremlin about an asset of national importance. Corruption and bribery are massive problems, even for Russians.'
Peter Hambro, chairman of Peter Hambro Mining, jokes that when he first started out 10 years ago in Russia, in the remote Amur region near the Chinese border, he did not have any money so wasn't in a position to pay bribes. But he says the company took the conscious decision early on not to cut its tax bill using perfectly legal tax- saving schemes, as many other companies (domestic and foreign) have done. The chairman of the gold miner says that, as a result, it has earned the goodwill " and protection from bribery and corruption " of local officials.
'We are the third-biggest taxpayer in the Amur region. Tax dollars are more efficient than bribes to get votes for local officials. Our taxes pay for local hospitals and schools, so they're happy. We have a very collaborative relationship with local officials.'
He has another tip for wannabe Russia investors: always work with a local company: 'Anyone who thinks you can walk into Russia and be a success without being involved with a Russian partner is deluding himself.'
It becomes apparent that everyone has a different way of doing things in Russia. There is no 'right way'. US metals giant Alcoa specifically decided that it did not want a Russian partner when it bought some rolling mills from Rusal, the aluminum company owned by oligarch Oleg Deripaska, last year.
Barbara Jeremiah, executive vice-president of corporate development at Alcoa, who led the 18-month negotiations with the Russians, says: 'We felt it was a complicated enough deal to get done without having a partner as well. We are pleased that the Russian government felt comfortable with Alcoa having 100 per cent ownership of the facilities, without a Russian partner. …