Investment image of Russia

Notes for a speech entitled, The Invesetment Image of Russia, by Jean Lemierre, President of the EBRD

17th Plenary Session, the Foreign Investment Advisory Council
Moscow, Russian Federation
15 September 2003

• Among the many positive signs of Russia's improving investment climate, one stands out: the fact that in the first half of 2003 - for the first time since transition began - there was a net private capital inflow into Russia. To put it clearly, Russians themselves have started to invest in their own economy on a massive scale. Despite some recent volatility, it appears to be the beginning of a longer term trend.

• The country's strong macroeconomic performance in itself should provide a good basis, and more room for manoeuvre (political capital, resources etc.), for accelerating structural and institutional changes.

There are encouraging reform advances in important and sensitive areas, such as power-sector reform, housing reforms and fiscal reforms, including the creation of an explicit stabilisation fund. Moreover, the Government is also paying renewed and increasing attention to administrative and civil service reforms. It is probably the single most difficult and the most important reform at Russia's current stage of transition. It has crucial implications for:

Quality of public services

Efficiency of management of state property

Reducing bureaucratic interventions in the economy (still key problem for SMEs)

Building trust in public institutions

Reform and policy implementation capacity of the government

There is clearly a need to move forward quickly in this area though progress here by its nature is extremely complicated. However, the recognition of the key importance of this task and the strong commitment of the leadership to this cause is there and these are a very good signs.

• The main laggards of the transition process have traditionally been and remain: banking reform and gas sector restructuring. Hopefully, reforms in these sectors will gain new momentum. However, two issues of systemic importance are to be emphasized: the implementation of the rule of law, and investment in the regions.

• The sound implementation of the rule of law is crucial for the country's investment climate in general. An independent, professional and predictable judicial system, serving equally all citizens and businesses, is a key institution. Russia still has to strengthen this fundamental institution. Though major advances have been made in launching judiciary reform, implementation is still seriously lagging behind.

• Intellectual property rights. Favourable legal changes took place in this area with the amendments to the laws on trademarks and patents in late 2002 and early 2003, but enforcement remains highly problematic. There are examples of this in many sectors. In "open markets" around Moscow and other cities, you find products of unidentified origin packaged with counterfeit brand labels. As a result, consumers are cheated, investors are damaged and Russia's investment image suffers.

• And finally about foreign investment in the regions. In fact, there is not one investment climate/image, but 89. Despite many reforms related to the federal/regional/local relationships, this remains an element for progress in the transition process. The regions typically are not yet fully interested in making attractive and opening up their markets to outside investors. They tend to provide specific regulatory treatment to local companies and shelter them against competition from new entrants, be they new SMEs, investors from other regions, or foreign investors. Here again, the solution is continued, consistent reforms. One way or another, every reform step has a regional dimension. Most important in this respect are the administrative and civil service reforms and progressive changes in intergovernmental fiscal relationships, giving more autonomy and responsibility to the lower levels of government.