RBW: Winter 2006/07

Russia Business Watch Vol. 14, No. 4

winter 2006-2007

Washington, DC

The Quarterly Report of the U.S.-Russia Business Council

ANNUAL MEETING:

Keynote Address: Carlos Gutierrez, U.S. Secretary of Commerce Page 3 Keynote Address: Ambassador Nicholas Burns, Under Secretary of State for Political Affairs Page 5 Keynote Address: Mikhail V. Margelov, Chairman, Committee on Foreign Affairs, Federation Council Page 8

14th annual meeting “NAVIGATING A RESURGENT RUSSIA”

Keynote Address: William J. Burns, U.S. Ambassador to the Russian Federation Page 10

ACTIVITIES:

usrbc briefing on Russia, the wto and globalization Page 31

usrbc briefing with james h. lambright Page 31

Legal update:

new Russian legislation: 2006 Year-End Update Page 32

Board of Directors

Russia Business Watch

Winter 2006-2007

E. Neville Isdell, Chairman of the Board Robert S. Strauss, Chairman Emeritus Eugene K. Lawson, President Theodore Austell, III, The Boeing Company Mumin K. Azamkhuzhaev, Caterpillar Inc. F. Guillaume Bastiaens, Cargill, Incorporated Warren P. Browne, General Motors Corporation Martin A. Cannon, New Health Sciences, Inc. Stephen Chase, Intel Corporation Patricia M. Cloherty, Delta Private Equity Partners James F. Collins, Akin, Gump, Strauss, Hauer & Feld, LLP Richard A. Conn, Jr., Conn International Group LLC Ivan M. Dezelic, Delta Air Lines, Inc. Robert W. Dudley, TNK-BP Terrence J. English, Baring Vostok Capital Partners Augie K. Fabela, II, VimpelCom Mark B. Fuller, Monitor Group Drew J. Guff , Siguler Guff & Company, LLC Jay M. Haft, Siberian-Ural Aluminum Company David J. Herman, Golden Telecom D. Jeffrey Hirschberg, Kalorama Partners, LLC E. Neville Isdel, The Coca-Cola Company Sergi Kaminsky, Washington Group International Lisi P. Kaufman, United Technologies Corporation Andrei I. Kazmin, Sberbank Owen-Christopher Kemp, Hewlett-Packard Company David S. King, Halliburton Company H.J. Markley, Deere & Company Robert May, Philip Morris Sales and Marketing Ltd. Lamar McKay, BP America Paul Mountford, Cisco Systems, Inc. James J. Mulva, ConocoPhillips Roger Munnings, KPMG Peter B. Necarsulmer, The PBN Company Richard D. Paterson, PricewaterhouseCoopers Peter J. Pettibone, Hogan & Hartson LLP Thomas R. Pickering, The Eurasia Foundation Robert H. Ragan, Bechtel Group, Inc. William R. Rhodes, Citigroup Daniel W. Riordan, Zurich-American Insurance Company Peter J. Robertson, Chevron Corporation Paul Rodzianko, Access Industries, Inc. Charles Ryan, Deutsche Bank Ltd. Claudi Santiago, General Electric Company Gregory Stoupnitzky, Morgan Stanley Bernard Sucher, Galt Asset Management Maurice Tempelsman, Lazare Kaplan International Inc. Rex W. Tillerson, Exxon Mobil Corporation Kevin Tomlinson, JT International Inc. Michael D. White, PepsiCo, Inc. Frank G. Wisner, American International Group, Inc. Daniel H. Yergin, Cambridge Energy Research Associates

Winter 2006-2007

Contents

Annual Meeting 3 nn Keynote Address: Carlos Gutierrez, U.S. Secretary of Commerce 5 nn Keynote Address: Ambassador Nicholas Burns, Under Secretary of State for Political Affairs

nn Keynote Address: Mikhail V. Margelov, Chairman, 8 Committee on Foreign Affairs, Federation Council 10 nn Keynote Address: William J. Burns, U.S. Ambassador to the Russian Federation

nn Panel: State Capitalism, Strategic Sectors & 14 Foreign Investment 16 nn Panel: Perception & Misperception in Media Coverage of Russia and U.S.-Russian Relations 19 nn Panel: Technology Development & Innovation 21 nn Roundtable: Russia’s Energy Future and the U.S. Role In It 24 nn Panel: Market Dynamics & New Avenues for Investment 27 nn Panel: The Government Relations Portfolio in Russia

Activities 30 nn Calendar of Events 31 nn Briefing on Russia, the WTO and Globalization 31 nn Briefing with James H. Lambright Legal Update 32 nn New Russian Legislation: 2006 Year-End Update

New Members 36 nn New Member Profiles

Russia Business Watch

The quarterly report of the U.S.-Russia Business Council 1701 Pennsylvania Avenue, NW, Suite 520, Washington, DC 20006 Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.org Moscow Tel: 7-495-102-9655 ditor: Svetlana Minjack • Assistant Editor: Jeff Barnett E Research Assistant: Svitlana Khyeda Photography: Olga Muzio Design: Svetlana Winslow

For additional information or copies of Russia Business Watch, please contact the Council at (202) 739-9180 or email RBW@usrbc.org.

PRESIDENT’S MESSAGE president’s message

in New York. As we bring you the final report on the Council’s 2006 Annual Meeting, I am also pleased to invite you to mark your calendars for our 2007 Annual Meeting in Moscow. The event will take place at the new Ritz-Carlton Moscow on October 23-24, 2007. More information will be forthcoming in the RBW and on the Council’s website at www.usrbc.org.

Last year was also a highly successful one for the Council, as illustrated by our Annual Members and Directors Meeting

Of particular interest to readers will be the keynote addresses by Secretary of Commerce Carlos Gutierrez, Under Secretary of State for Political Affairs Nicholas Burns, U.S. Ambassador to Russia William Burns, and Member of the Federation Council of Russia Mikhail Margelov.

Panel sessions at the meeting included a discussion with the chairmen of three of the world’s largest energy companies operating in Russia about how they view future prospects for investment in the sector. A separate panel discussed the rising state capitalism in Russia, and how

One of the most popular sessions of the meeting focused on how Russia and the United States perceive each other in an era of deteriorating relations, with a focus on the role that the media plays in forming these perceptions and misperceptions.

Along with a discussion on the new dynamism of the Russian market, the Annual Meeting featured a panel on the newly-emerging practice of government relations in Russia, and why this profession is becoming increasingly essential for foreign and domestic businesses alike.

As the Council enters its 14th year, we continue to deliver unique value to our members as well as to the U.S.-Russia bilateral relationship. We hope that you will remain a part of our efforts to foster a vibrant and dynamic marketplace in Russia, as well promote stronger bilateral commercial relations.

With best wishes,

Eugene K. Lawson

Russia Business Watch

Looking back on 2006, it was certainly another remarkable year for Russia — one in which it re-emerged on the world stage as a confident global player.

President Putin played host to the G-8 meetings in July, Russia repaid all of its Paris Club debts, the country witnessed another year of GDP growth exceeding six percent, and signed a bilateral agreement on WTO accession with the United States. Rosneft launched Russia’s largest IPO to date, as other Russian companies expanded their operations into the international market. The year was also one in which Russia’s government continued to assert itself in the strategic sectors of the economy, most notably in oil and gas, aviation and metals.

In 2006, the USRBC worked hard to assemble an Annual Meeting that would add to the success of the Council’s activities, as well as continue the momentum generated from the previous year’s meeting in Moscow. This issue of Russia Business Watch contains a report on the event in New York, as well as several other activities organized by the Council.

this situation is affecting the investment opportunities for foreign companies.

Winter 2006-2007

ОБРАЩЕНИЕ ПРЕЗИДЕНТА

Russia Business Watch

Winter 2006-2007

Оглядываясь на прошедший, 2006й год, хочу отметить, что он был очередным незаурядным этапом для России — годом, когда страна возродилась на мировой арене как уверенный в своих силах “игрок”. В июле Президент Путин принимал участников встречи в верхах “Большой восьмерки” в Санкт-Петербурге; Россия погасила все долги странам “Парижского клуба”; ежегодный рост ВВП в очередной раз превысил шесть процентов; было подписано двустороннее соглашение с США о присоединении к ВТО. Роснефть провела крупнейшее на сегодняшний день первоначальное публичное размещение акций российской компании, в то время как многие другие российские компании расширили сферу своих действий, включив в нее международные рынки. В 2006 году российское государство также продолжало укреплять свои позиции в стратегических секторах экономики, главным образом в нефтегазовой отрасли, в авиации и металлургии.

Весьма успешным оказался прошлый год и для Совета, как продемонстрировало наше Ежегодное Заседание членов и директоров Совета в НьюЙорке. Предлагая вашему вниманию заключительный отчет о Ежегодном Заседании Совета в 2006 году, я также пользуюсь возможностью предложить вам пометить свои календари — в нынешнем году наше Ежегодное Заседание пройдет в Москве, в новой гостинице “Риц-Карлтон”, 23-24 октября. Дополнительную информацию о предстоящем Ежегодном

Заседании Совета можно найти на нашем сайте www.usrbc.org. В 2006 году Совет приложил много усилий к организации своего Ежегодного Заседания, чтобы это мероприятие не только приумножило бы успех деятельности Совета, а также продолжило бы поступательное движение, начатое на совещании в Москве в 2005 году. В этот выпуск Russia Business Watch мы включили материалы Ежегодного Заседания в Нью-Йорке, а также отчеты о ряде других мероприятий Совета. Особый интерес для читателей представят доклады Министра торговли США Карлоса Гутьерреза, заместителя Госсекретаря США по политическим вопросам Николаса Бернса, Посла США в России Уильяма Бернса, члена Совета Федерации России Михаила Маргелова. Программа Ежегодного Заседания включала, в частности, круглый стол с председателями Советов директоров трех из числа крупнейших энергетических компаний мира, работающих в России, во время которого участники обменялись мнениями о перспективах инвестиций в сектор. В ходе отдельного рабочего заседания обсуждалось укрепление государственного капитализма в России, и как это сказывается на инвестиционных возможностях для иностранных компаний. Одной из наиболее резонансных дискуссий в ходе Ежегодного

Заседания стала встреча, на которой участники обсуждали как Россия и США воспринимают друг друга на фоне ухудшающихся двусторонних отношений. Акцент был сделан на роль, которую играют СМИ в формировании такого восприятия и заблуждений. Помимо дискуссии о новой динамике российского рынка, в ходе Ежегодного Заседания также прошло обсуждение с группой экспертов формирующейся в России практики взаимодействия с органами государственной власти (Government Relations), и причин, по которым эта профессия становится все более важной как для иностранных, так и российских компаний. На пороге 14-го года существования Совета мы продолжаем работать на благо наших компаний-членов, а также вносить уникальный вклад в развитие двусторонних отношений между США и Россией. Надеемся, что вы, как и прежде, примите участие в наших начинаниях по содействию развитию динамичного рынка в России, а также укреплению двусторонних коммерческих связей. С наилучшими пожеланиями,

Юджин К. Лоусон

KEYNOTE ADDRESS

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 Carlos Gutierrez

nn U.S. Secretary of Commerce

The following is an excerpt of Secretary Gutierrez’s keynote address to Council members.

“This is, as you have all said, an important time for U.S.-Russia relations.

It has been 20 years since the opening of Russia; 20 years since the light of freedom and openness began to shine on the people of Russia. An entire generation of Russians has come of age, at a time of greater freedom and at a time of greater opportunity. They do not know, first hand, about communism.

With a freer Russia, the world is indeed a better place. We know there is progress to make, but I think we owe it to ourselves first to recognize the tremendous progress that has been made. . . .

U.S. exports to Russia grew 33 percent in 2005 and another 20 percent on top of that in 2006. Russia has experienced eight straight years of economic growth, averaging 6.5 percent — few countries can claim that record of growth.

to continue, open, stable and transparent markets will have to exist — markets that are receptive to real competition, both foreign and domestic.

Global capital markets and global capital investment is made in places and in projects, as you all know, with low perception of risk. Low risk tends to attract capital — that is a fundamental rule that we all use as investors.

Further reducing risk for potential investors will help Russia keep more capital at home and attract more capital abroad. Russia can do a lot to attract more capital, and I believe that there is capital that wants to go to Russia, and it is waiting for a sign. We are confident that Russia will address the challenges to progress.

Last month, as was mentioned, the Deputy Chairman of the Russian Central Bank was murdered. Andrei Kozlov was a friend of this organization, he was a patriot of Russia and he

was a reliable, respected and honest public servant. He should have been with us today. Russia cannot afford the kind of lawlessness that threatens violence against public officials and private businesses. Thanks to the hard work of people like Andrei Kozlov, Russia’s banking system has been revitalized and strengthened, and the country’s muchimproved financial system serves as a model for many countries around the world. The reforms, the integrity and the confidence that he put in place must be built upon. This confidence needs

Some U.S. companies tell me that a certain “soft nationalization” is taking place in some sectors of Russia’s economy. If so, this is a disturbing trend that challenges the success Russia has had in promoting stability, and I think Russia has proven the power of an open market and private capital. American companies are anxious to invest in Russia, but many remain hesitant to do so. Some have invested tens of millions of dollars in a production facility only to be faced with a competitor backed with preferences in the form of govern-

Winter 2006-2007

Russia’s budget has been in balance or surplus in recent years, and real disposable income has increased 11 percent in the past year — that is real disposable income — 11 percent in one year alone.

This prosperity has enabled Russia to engage on the world stage more than ever before . . . . Foreign companies have accelerated a commitment of resources in Russia with $16 billion in new investments in the first half of this year alone. This is much higher than at any other time in modern history.

However, we know that for this trend

to be extended to all other branches of government and at all levels — be it federal, regional or local. Confidence grows when contracts among private companies and state agencies are respected and honored. Confidence grows when courts give even-handed, equitable treatment to all contracts between all parties. So, very simply, confidence grows when there is transparency, predictability and a sense that capital will be protected. This is a time to be vigilant against those who would seek to corrupt the system for their own needs, especially after the great progress that Russia has made over the past 20 years.

Russia Business Watch

“We welcome efforts by Russia to work with international partners in promoting stable markets with adequate investments to support Russia’s supply commitments and ensure its own economic growth.”

Secretary Gutierrez addresses Council members.

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 ment ownership or capital. These kinds of actions stifle competition and hurt Russia’s reputation just when it is being strengthened and just when it is becoming more attractive to corporations around the world. . . . We believe that companies can compete, and companies only want to compete — they only ask for a level playing field and, ultimately, that level playing field will be good for the Russian economy.

We in the United States have found that open competitive markets are the best approach to creating dynamic economies. Industries that are open to competition grow and innovate more than those that are not, and that has become a fundamental principle that we have seen repeated time and again.

Russia has come a long way, and it would be wrong not to recognize this.

It has been a phenomenal transformation in only 20 years. We know it still has far to travel, but it is traveling from a very much advanced position in that journey.

Russia Business Watch

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Some of you may wonder, as I do, whether Russia’s model of creating state-favored, national champions will foster competitive Russian industry or

signals on how these resources will be developed and supplied to the market.

We welcome efforts by Russia to work with international partners in promoting stable markets with adequate investments to support Russia’s supply commitments and ensure its own economic growth. Transparent rules and regulations provide the best environment for businesses to be launched, to grow

Yet, with its unique resource endowment and consequent influence on energy markets, Russia should provide clear

Joining the World Trade Organization (WTO) will bring many benefits to Russia. The obligations of a WTO member are based on the economic principles of openness, transparency

“Russia has been and will continue to be one of our firmest partners in the war on terror. It is very important that a strong Russia continue to thrive, so that we can work together to make the world a more peaceful place.” and to thrive. When businesses are launched, when businesses grow, when businesses thrive, the citizens thrive.

Jobs are created, the economy grows, and prosperity grows. Transparency is a long-standing goal we seek in all our economic relationships, not only with Russia.

A crucial basis for transparency, of course, is a free media. . . . A free media helps provide shareholders and the public with access to the greatest possible range of information. Without

“Our relationship with Russia is one of the most important bilateral relationships we have in the world. We have many shared interests and increased collaboration will benefit us all and benefit all of our people.” stifle competition and innovation. It is a question that must be studied, and we encourage careful debate on the economic pros and cons. Russia’s energy resources make it a critical force for stability and efficiency in the world. We plainly acknowledge Russia’s sovereign right to develop and regulate its own resources.

come too far — this is not a time to be sending a signal of concern to the world. I know that this concerns you as much as it concerns all of us.

freedom of the press, there can be no transparency. This is why the killing of journalists such as Anna Politkovskaya . . . causes such great concern, and it should be a concern not just for those of us in the business community who depend on transparency for a vibrant, free press to make informed investment decisions, but it should also be of concern for those in the Russian government who recognize the value of transparency for Russia’s economic future.

There is too much at stake. Russia has

and competitiveness. Our government has a continuing dialogue on this issue with Russian officials and our U.S. Trade Representative, Susan Schwab, has noted that both sides are working very hard toward this goal. A strong accession package will benefit the global market, and — most importantly for Russians — it will do much to secure and extend the country’s impressive economic achievements. WTO accession is probably one of the clearest messages that Russia will send to the whole world. We are seeking a bilateral agreement that is sound on commercial terms. As we have stated before — and President Bush has stated this — for us, this is very much a commercial decision, not a political decision. So, when Russia achieves a bilateral agreement and when Russia achieves accession, you can be sure it is done on the basis of commercial merits. [Editor’s note: Russia and the United States signed the bilateral agreement on November 19, 2006.]

Agricultural safety and the protection of intellectual property rights are two areas that we are working hardest to resolve.

One example that I will mention is that — and this is the kind of company that does nothing for Russia’s reputation with the rest of the world — the world’s highest volume online seller of

pirated music, allofmp3.com, continues to operate from Russia. Getting that company out of the Russian market would send such a tremendously strong message to the world and would make all of us who believe in Russia very proud of our association in that marketplace. So, although not all of the issues are completely resolved, our negotiators continue to work out the details. The bilateral agreement is only part of the negotiation; we are working with other trading partners on the multilateral requirements to complete the negotiation. We cannot do this alone, and others, like the EU, are playing an important role. At the end of the day, the pace of progress is up to Russia.

KEYNOTE ADDRESS

There is a great deal at stake, economically, both for Russia and for the WTO. Having Russia as part of the global trade framework will be a huge step forward, not just for Russia, but also for the whole world. Russia has a bright future and a leadership role to play among nations. The United States wishes to see Russia fully integrated into world markets. There is absolutely no advantage for the U.S. in having a Russia that is economically weak and thus, politically unstable, unpredictable or undependable in helping to confront the global challenges that both of our nations must confront and solve together. Russia has been and will continue to be one of our firmest partners in the war on terror. It is very important

that a strong Russia continue to thrive, so that we can work together to make the world a more peaceful place. We believe passionately in the future of Russia and in the future of her people.

A free society with open markets, open press and a strong and stable economy can only bring increased growth and prosperity to Russians and can only be positive for the whole world. As President Bush has indicated many times, it is vitally important that our two nations continue to engage one another. Our relationship with Russia is one of the most important bilateral relationships we have in the world.

We have many shared interests and increased collaboration will benefit us all and benefit all of our people. . . .” n

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006

Nicholas Burns

nn Under Secretary of State for Political Affairs

The following is an excerpt of Under Secretary Burns’s keynote address to Council members.

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We are again in a difficult patch in our relationship in some respects, where we do not always see eye to eye and where we Americans do not always agree

I would just like to suggest as a thesis this evening that the United States has many vital national interests tied up in this relationship with Russia, and we also have points of divergence, and we need to keep both in view and maintain a balanced view of this relationship. As Americans, we need to answer the question of how we move forward on those issues where our interests converge. I would say on points of convergence that if you look at the greatest challenge facing our country, it is certainly the fight against global terrorism. There

is no greater challenge to the future of our country than winning that war, whether it is against Al-Qaeda or the other terrorist groups in the Middle East or global terrorism itself. I do not see, as a career diplomat, any difference of opinion in Washington between the

Russia Business Watch

“Thank you so much and good evening. I have been involved, like many of you in the business community, in Russia since the 1980s. And what has struck me about the quality of debate about this relationship, in our country especially, is how so many people have given up on it at so many points along the way since the Soviet Union fell on December 25, 1991 and Russia emerged — an independent, self-confident Russia — along with fourteen other nation states. It was as if, since Russia was not a perfectly formed, Jeffersonian democracy, that somehow we felt as if the experiment of democratization had failed.

with what happens inside the Russian Federation. You hear the critics say that this relationship does not have a good future and that the time we have spent together trying to build a commercial relationship, cooperate in the nuclear sphere, work together at the United Nations or in the new NATORussia relationship, somehow does not count.

Under Secretary Burns gives the Gala Dinner keynote address.

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 Democratic leaders of the Congress and the Republican leadership — President Bush and his cabinet — about that single issue.

What has tied us together with Russia since the morning of September 11th, 2001 — when President Putin was the first world leader to call President Bush — has been the shared concern that both of us are targets of global terrorism; that both Russia and the United States have an enormous amount at stake in this battle, and I think that we have cooperated on a good basis since that time.

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I inherited the chair of a group that Tom Pickering started in 1999 — the U.S.-Russia Counterterrorism Working Group. I have tried to follow in Tom’s footsteps and in Richard Armitage’s footsteps during President Bush’s first term in office by asserting that we have no greater priority with Russia than to have good intelligence and law enforcement cooperation, and to make sure that we are working together in those parts of the world where both of us are targeted by violent terrorist groups.

That brings us together in this relationship.

The second issue is the fight to restrain the proliferation of nuclear weapons technology in the world. The U.S. and Russia are the two original nuclear powers in the world, and we have a common interest in stemming the proliferation, not just of chemical and biological weapons, of course, but also of nuclear technology. Our two countries have tried very hard to restrain the growth in the number of countries who claim to be nuclear powers, and in particular, to try to find effective ways to prevent the proliferation of fissile material or tactical nuclear weapons to terrorist groups or states that would actually try to use them to pursue their own ends. That is another important point of convergence with the Russian Federation.

The news that all of you, of course, are reading about is the emergence of two new countries that seek to become nuclear weapons powers and it is the common interest of Russia and the U.S. to stop them. I speak of course of the announcement by the North Koreans that they have tested a nuclear device. . . . Given the nature of that regime and the unpredictability of that country, and given the fact that every other leading country of the world had tried to convince it not to undertake that test, it is clear to us that we now have a common interest with Russia, China, Britain, and

Council. Again, as in the case of North Korea — not that sanctions are always the perfect instrument of diplomacy, they sometimes are not — we must convince the Iranians that they too are isolated, and that the major powers of the world are sending a united and forceful message. . . .

This is an important moment for the international community. We have achieved a degree of unity through diplomacy. We have not used military force or the threat of military force, but rather diplomacy to keep Russia, the

“In an era of globalization, the United States and Russia must work together to address the true threats to our future security.”

France — the permanent members of the U.N. Security Council — to work toward a sanction resolution. We must impress upon the North Koreans that they are completely isolated in the world and that they have to roll back their nuclear ambitions. This is a country that has been a serial proliferator of nuclear technology to the most unstable and dangerous regimes in the world. . . . So here, we have another common interest with Russia. . . . A similar situation is developing with Iran. The permanent members of the UN Security Council, on June 1, 2006, put forward a settlement offer to Tehran. . . . The goal of the negotiations would be to work out a deal to provide civilian nuclear power to the Iranian people without giving the Iranian government access to the sensitive technological process used to create nuclear weapons. . . . The Iranians said no.

As a result, we have no alternative now but to go down the second path that we told them about on June 1. Since Iran is not willing to negotiate or give up its quest for nuclear weapons, we have to resort to sanctions in the UN Security

U.S., China, the Europeans, and other nations — India, Brazil, South Africa — all sending the same message to North Korea and Iran: We do not want you in the nuclear club. Iran and North Korea are welcome, as law-abiding members of the international community, into cooperation with us, but not as members of a nuclear club. As I think about the relationship between the U.S. and Russia, and I read the constant opeds in our press that claim that nothing is going right in this relationship, I see a great deal of strategic convergence on these issues that are not just important but vital to our future.

I would suggest an additional area of strategic convergence. In an era of globalization, the United States and Russia must work together to address the true threats to our future security.

We must combat transnational threats such as global climate change, trafficking in women and children, international crime cartels, the convergence of global terrorism with weapons of mass destruction. . . .

These global threats cannot be resolved by the United States alone, despite the power that we have in the world. Our

country cannot follow a unilateralist path and be successful in fighting those challenges. We have to have the cooperation of the strongest countries in the world, and the Russian Federation is one of them.

As I look into the future as a career diplomat, putting aside partisan politics in our own country, I do not see any alternative but for America to be fully engaged as a global leader. Not alone, but working with other great powers in shifting coalitions and alliances, depending on the issue. I think that Russia will be with us the vast majority of the time because I would imagine that Russia’s leadership would define some of its national interests in much the same way that I have now.

We were certainly sorry to see the murder in Moscow of the courageous journalist, Anna Politkovskaya. She

Finally, I would say that an area on which we can certainly do a better job of working together is to support the fulfillment of this great experiment in democracy in Europe. Most of us lived or grew up in the Cold War and we remember the Iron Curtain and the cruel division of Europe. Certainly, the most satisfying and constructive achievement of the last 15 years has been the hope that all Europeans can be free and that the divisions within Europe can be firmly erased. The hope that Europe from the Atlantic to the Urals and beyond can become one of the few places on Earth where there is political stability and economic growth and where democracy flourishes.

We have some remaining work to do in this area. In southeastern Europe, we intervened twice in the 1990s, and quite rightly so. President Clinton

was masterful in doing this to stop the war in Bosnia and to stop the war in Kosovo. With the help of Ambassador Frank Wisner, we hope to see Kosovo’s dreams for independence fulfilled in just a few months time. However, we also need to see Moldova relieved of foreign occupation. We need to see the withdrawal of Russian military equipment and personnel from both Moldova and Georgia. Countries that want to assert their true independence and sovereignty have a right in our modern world, in the 21st century, to pursue that kind of a future.

Now, we did not take sides in the dispute between Russia and Georgia because we are friends with both countries. However, we do hope that the two countries can work out their problems in a spirit that is not one of intimidation or retribution, but one of fairmindedness. That is the way democracy should function in a 21st century Europe. The remaining challenges, in my view, for Russia, the United States and all of our European friends who want to see this achievement, lie in the Caucuses, in Central Asia, as well as in Eastern Europe. . . .

I would like to conclude by saying to the business community here that we want to help you invest in Russia and to trade fairly with Russia. We will be your advocate and you should let us know when you need my services or that of my superiors. Thank you very much. . . .” n

Russia Business Watch

. . . I will conclude this short, and forgive me, fairly simplistic presentation by saying we do have points of divergence.

That is not unusual, given the different cultures and given the different histories of our two countries, but I am compelled to make several important points.

I speak knowing that Russia is a democracy, and that it has a right to make sovereign decisions. However, I must say that many Americans — friends of Russia looking at the evolution of Russian democracy over the last 15 years — are disturbed to see a lack of press freedoms that we would always want to see in a democratic country.

was someone who argued in the best Russian tradition for human rights and against some of the excesses that are occurring in Russia today. She was — and this is not well known — a dualcitizen of both Russia and the United States, having been born in the United States. . . . Many of you in the business community remember Paul Klebnikov.

Both Secretary Rice and I have met with his family to assure them what we will work with the Russian government to see that justice is done and that his killers are found. There have been so many murders of this type in Russia that the friends of Russia must raise their voices in concern.

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KEYNOTE ADDRESS

Mikhail V. Margelov

nn Chairman, Committee on Foreign Affairs, Federation Council

The following is an excerpt of Mr. Margelov’s keynote address. “. . . I would like to touch upon the problems of Russia’s economy today and, of course, I will have to talk about Russia’s situation in the energy sector. We have just hosted the G-8 Summit, and one of the major items on the agenda was the issue of energy security. The summit saw a great deal of discussion about Russia’s role in the hydrocarbon market, and statements were made about our country being a “great energy power.” This was much to the liking of some Russian politicians. At some point, this phrase disappeared, and I am happy to see it go. I never really understood the concept of a “great energy power.” The members of the G-8 agreed that the main prerequisite of energy security was the diversification of sources of energy and means of delivery. Energy sources fall into a sort of triangle: the user, the supplier and the transit country.

Ignoring the transit component of this triangle leads to circumstances that are similar to the misunderstanding that we witnessed at the time of the natural gas incident between Russia and Ukraine.

The situation is well known and easy to understand. Ukraine was stealing gas from the pipeline, and then Gazprom demanded payment at the market rate.

However, the packaging of this incident was far from perfect. Therefore, the real objectives of all of the parties involved never became clear to observers. The most important thing here, in my view, was achieved and we were able to convince our partners in Ukraine that gas costs what it costs in the market and not a penny less. . . .

Turning to the economy, Russia is experiencing a period of strong growth.

From February to May of this year, GDP growth stood at more than 6 percent, industrial production increased by 5 percent and capital investment increased by more than 20 percent. . . . Russia has budget and balance of payments surpluses. One can carry on with these positive statistics for a long time. We know that Russia’s has yet to accede to the World Trade Organization (WTO), and I will not dwell upon this subject for any length of time. Let me just mention that many in the Russian political elite believe that Russia is being forced to accept some obligations that go beyond the standard conditions of WTO accession.

Why am I talking about the Russian political elite’s perception of the situation outside of Russia? Elections to the State Duma will take place in December 2007, and presidential elections will be held in March 2008. So, an increasing number of international issues will also become aspects of the internal political discussion in Russia. As the elections draw near, these discussions will become more heated and tense.

Therefore, whatever is happening outside of Russia will become part of the

Mikhail Margelov discusses the Russian economy.

innovation sectors. This is an objective need. Some experts today forecast a coming investment boom, while Minister of Economic Development and Trade German Gref calls upon investors to become venture capitalists in Russia. What, though, are the official priorities for the development of Russia’s economy?

First is the reform of the social sector and the system of governance, the decrease of the dependence on the export of raw materials and increasing public confidence in the authorities. There is no apparent connection between the investment boom and the increasing state intervention in the

“It is clear that the economy needs additional investment, especially in the high technology and innovation sectors.” election-cycle debate. The campaigns are already underway and will continue to gain momentum as the elections draw closer.

Next, I would like to address the problems in the Russian economy today.

Current economic growth is driven and maintained by high prices for commodities exports. It is clear that the economy needs additional investment, especially in the high technology and

economy. Electricity generation and delivery and the transportation infrastructure are two of the barriers to growth that are cited most often. To remove those obstacles, the support of the government will be required.

The diversification of oil and natural gas transportation are also among the priorities. Among the recent successes for Russia was the cooperation with Greece and Bulgaria in the construction

of the Burgas-Alexandroupolis pipeline.

The main purpose here is, of course, to bypass the Bosporus Strait, where tankers stand in line for weeks in a row.

Unfortunately, I am unable to mention any such success stories between Russia and the United States.

I do not mean to say that our relations with Europe are perfect. The famous protocol on transit has not been ratified and, on certain issues, there is little agreement with our European partners.

Certain observers and journalists have tried to blame Russia for energy imperialism. They talk about the problems with natural gas exports to Ukraine and Europe’s dependence on Russian natural gas. This is, allegedly, Russia’s new geopolitical weapon.

“It is impossible to deny the importance of energy in international relations today.” ernize the economy is far greater than the amount saved in the Stabilization Fund. Third, despite recent measures, the social sphere is still poor in Russia.

Government spending on education is less than four percent of GDP. Given the current size of the population today, it is improbable that future generations will receive an education on par with that of Norway, for example. Many experts also believe that Russia’s economy is beginning to suffer from so-called Dutch disease.

The government is fearful of giving any kind of orders or directives to develop certain sectors of the economy, and this may puzzle some of you. However, the market economy mentality has so permeated the government that the very idea of administrative interference in the economy is met with fierce opposition in the ministries that are involved in financial and economic decisions.

Together with corruption, there is a new type of concern — the ruble is quickly appreciating and our Ministry of Finance is alarmed at this. The manufacturing and processing industries and the research and development sector are not growing.

Russian parliament on his trip in various regions of Russia. He talked to the voters, and most of the people used the word “order” more often than the word “law”.

While American voters see law and order as being intertwined, for most of Russians order is still a higher priority than law. . . It is important to keep this in mind when talking about Russia’s economy, when criticizing certain actions on the part of the government or in regard to what is happening in domestic and foreign political discussions.

Finally, I would like to say a few words about the Sakhalin and Shtokman projects. As soon as the environmental problems emerged in Sakhalin, the Federation Council created a parliamentary committee to study all of the circumstances of the project. This committee was created jointly with the deputies of the State Duma, and I would suggest that it is indeed working with the interests of the companies involved and the region in mind. The idea of protecting the rights of investors, including foreign investors, is very

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I believe that one should go beyond emotions and look at the real figures, the real statistics. Apart from cooperation with Europe, Russia would like to expand relations in the Asia-Pacific region, including through energy relations with China, Japan and other countries of this region. To countries like China and Japan, Russia is just a means of diversifying their imports. Russia is not going to oust other suppliers from

However great our exports are, though, Russia will not become a country of energy well-being, such as Norway, and there are several reasons for this.

Russia’s export potential is still limited due to the high level of domestic consumption of energy. Second, the amount of investment needed to mod-

It is important to talk about this because Russia is entering the pre-election stage. As I said earlier, foreign political and economic problems are becoming a factor in domestic discussions. Russia’s domestic economic problems are becoming a factor in internal political debate. While trying to win over new voters, the parties in the Duma elections and the presidential candidates will say what they think the electorate wants to hear. Significantly, the Russian electorate is still leftward leaning — sometimes to the extreme left. In December 2003, I accompanied the governor of the region that I represent in the upper chamber of the

Russia Business Watch

It is impossible to deny the importance of energy in international relations today. Instead of geopolitics, we now deal with geo-economics. While deliveries of oil and gas by Russia are to be regarded as a means of applying pressure, the flow of hydrocarbons in Europe is actually more significant to Russia. Russian supplies constitute only a third of Europe’s energy consumption. However, sales of oil and gas to Western Europe make up the majority of Russia’s energy exports. Our financial and economic reliance and dependency on those shipments is far greater than Europe’s reliance on the energy resources that come from Russia. So, who depends on whom? Who relies on whom?

those regions because the demand for hydrocarbons is so great that there is room for multiple suppliers. I have never seen any kind of strategy written in Russia, so I would find it difficult to answer the question: Who will Russia have greater trade with, Europe or Asia?

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KEYNOTE ADDRESS

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field will be developed, it is unnecessary to worry about it until the contracts are signed and we know the final decision.” n

William J. Burns

nn U.S. Ambassador to the Russian Federation

The following is an excerpt of Ambassador Burns’s keynote address.

“Good Afternoon. Thank you very much Neville for that extremely kind introduction. As you said a year ago shortly after my arrival in Moscow as Ambassador, I did have the pleasure of hosting all of you at Spaso House during your Annual Meeting. A lot has happened since then; life certainly has not been dull. Through it all, however, my admiration for the USRBC and for the leadership of Neville Isdell and Gene Lawson has only deepened. I would also like to add my own best wishes and appreciation to Blake Marshall as he leaves the Council. I would like to add my own expression of respect for Tom Pickering, who so richly deserves the honor that you bestowed on him last night and who, quite simply, is the best that the American diplomatic profession has to offer.

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is said is just words until the contracts are signed. So, I would stop worrying about Shtokman. We have heard so many variants of how the Shtokman

Serving as the luncheon speaker at the conclusion of a conference as rich in expertise as this one is, I must admit, a little bit intimidating. It is hard to find the right strategy when so much has already been said. One of my favorite authors, Mark Twain, said that, “it is my custom in situations like this to speak until I have my audience cowed.” I think I will spare you that approach this afternoon. Instead, what I will try to do is offer a sense of perspective about the relationship between the United States and Russia — a relationship that is in many ways more important for

American interests and more complicated to manage than at any time since the end of the Cold War. The truth is that this is a period of considerable frustration and disappointment about our relationship in both Washington and Moscow. For Americans, there is concern about the over-centralization of power in Russia and about how that power is used in dealing with some of its neighbors. For Russians, there is a growing conviction that Americans really do not understand how difficult the last 15 years have been for Russia; that Americans are too quick to lecture and to criticize; that Americans like to say that they welcome Russia’s reemergence as a great power, but that we really do not mean it. There is a growing risk, it seems to me, that in our current situation of mutual dissatisfaction, we are losing sight of what we have to gain by working together. That risk is not likely to recede in the next couple of years when the intersection of our two domestic political processes is not likely to bring out the best in either of us.

This is a moment for us to take a step back, and to take a careful and honest look at what is at stake. With that in mind, I will make only three basic points.

The first will seem like yet another State Department bureau-

crat’s flair for declaring the obvious, but it bears repeating. Russia matters. It is the world’s largest producer of hydrocarbons; America is the world’s largest consumer. Russia is the only nuclear power comparable to the United States.

At a moment in history when civilian nuclear technology is in growing demand and the proliferation of nuclear weapons is a growing danger, the safety and security of Russia’s vast nuclear arsenal remains critical to American interests. Russia, like the United States, is a permanent member of the U.N. Security Council, with an influential voice on the most crucial diplomatic challenges of our times from Iran to North Korea. Russia remains the largest country on the face of the Earth, sitting astride Europe, Asia, and the broader Middle East — three regions whose future will shape American interests for generations to come. Whether the issue is combating the violent extremism overflowing the borders of troubled Middle Eastern societies, or realizing the potential and dramatic

Ambassador Burns discusses U.S.-Russia relations.

rise of China, our interests converge in many areas. The truth is that Russia and the United States need each other, and the rest of the world needs a healthy relationship between us — not in the same way that applied during the Cold War, but in ways that are all too easy to neglect today.

My second point may seem just as obvious, as the first one. Russia is still in the very early stages of its historic post-Communist, post-Soviet, postImperial, post-Cold War transition. It is not the Russia I left a decade ago — a place that was flat on its back economically, vibrantly chaotic politically and dependent diplomatically.

Russia’s resurgence, symbolized by its hosting of the G-8 summit last July in St. Petersburg, is impressive in many respects. However, it will likely take a generation or more to determine whether Russia will take full advantage of the huge, energy-driven opportunity that lies before it. The Russia that I see today — not only from my “inside the ring road” perspective, but from twenty trips outside Moscow over the past year, from one end of the country to the other — is going in a lot of different directions; some wrong, some right, some much too early to tell.

While the gap between rich and poor is still much too big, the number of people beneath the poverty line in Russia has been cut in half since the end of the

a habit of being “preachy” on these questions that does not always endear us to others. I am fully aware that a little humility is not a bad thing for Americans offering judgments about a place as complicated as Russia. That said, it does little to gloss over the very real danger that Russia’s excesses will eat up its successes.

Corruption is among the worst of these dilemmas. It was a big problem when I lived in Russia ten years ago, and it is a much bigger problem today. It is, in effect, an extra tax weighing most heavily on small businesses. It has a corrosive effect on the rule of law, crippling law enforcement and breeding violence. It poisons the legal system

“The truth is that this is a period of considerable frustration and disappointment about our relationship in both Washington and Moscow.”

1990s. Most boats are rising economically across Russia and a middle class is beginning to emerge, perhaps as much as a quarter of the population. It is true that this is not yet the tax-paying, politically engaged, self-aware middle class that has developed over time in other societies. However, it is the beginning, at least in my opinion, of the core constituency for modern economic and political institutions — a growing group of people with a real stake in how decisions are made, how their money is used and how rule of law can protect their equities and those of their children. The gradual emergence of a middle class strikes me as among the most promising trends in Russia today.

There are other, less dramatic challenges with large question marks hanging over them. It is obvious that sensible investment in the energy sector and diversification beyond it are keys to Russia’s long-term economic success.

How do you do that, though, without predictable and transparent rules of the road? How do you protect Russia’s greatest resource — its remarkably cre-

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That is the good news. The bad news is something that Russians themselves must face. It has to do with deeply troubling issues for which Americans do not have all the answers, but that Russians neglect at the risk of squandering the moment of opportunity that economic growth has brought. I say that fully aware that Americans have

and makes a mockery of jury trials and judicial independence. How exactly do you fight corruption, as President Putin and other senior Russian officials have vowed to do, without a more or less independent media and a more or less independent judiciary? How do you expect to see that kind of responsible media emerge if brave journalists like Anna Politkovskaya and Paul Klebnikov are murdered and their murderers go unpunished? How do expect to create a clean, modern, reliable banking system on which so much of Russia’s economic future depends when a brave reformer like Andrei Kozlov is murdered with seeming impunity?

Russia Business Watch

The positive side of the ledger starts, as all of you know very well, with an economic rebound that was impossible to imagine in the 1990s. Fueled by soaring energy prices, but also benefiting from a budget discipline that Americans can only envy these days, economic growth has averaged nearly seven percent over the last seven years. Russia’s hard currency reserves total $250 billion, while the Stabilization Fund holds some $80 billion. Moreover, Russia has dramatically transformed itself from debtor nation to creditor. With the 12th largest retail market in the world, the size of the Russian economy will be about $1 trillion this year, and some think it could be close to $2 trillion by 2010.

Unlike the Soviet Union, Russia is connected to the world in powerful ways today, and young Russians wake up every day with choices of which their parents could only dream. Russia is among the top 10 countries in the world today in total number of Internet users, ahead of India and Brazil. It is in the top five in the number of books published every year. Mobil phone ownership has gone from 3 million in 2000 to 80 million today, and laptop sales have gone from 40,000 six years ago to over 600,000 today.

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ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 ative and well-educated people — without investing much more aggressively in education, improving healthcare, dealing systematically with demographic decline, fighting harder against piracy of intellectual property, and combating intolerance? How do you do any of that without a healthy civil society to complement the role of government?

None of these steps is easy. None of them is a favor to Americans or any other outsider. All of them are profoundly in Russia’s self-interest and all of them are most likely to lead to success if they are rooted in the painstaking pursuit of democratic institutions, the rule of law and integration into the global economy.

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My third and final point has to do with how to put U.S.-Russia relations in a more sustainable, long-term footing.

Navigating relations with a resurgent Russia is not a challenge that comes with a neat map or ready-made guide for action. The old Cold War charts do not apply. The grand strategic partnership that we may have imagined a few years ago has not materialized. What we are left with is a complicated great power relationship with a Russia in the midst of a transition that is filled with

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and political institutions are the keys to fully realizing Russia’s enormous potential — not some Trojan horse aimed at weakening Russian sovereignty or its influence over its neighbors. We both need to get used to the fact that we need each other; that we need to manage our differences better while still addressing them plainly; that we need to be as energetic in expanding common ground as we have been lately in voicing our frustrations. I do not underestimate for a moment the difficulties that we have between us right now; I have the pleasure of wrestling with them every day, from the implementation of the new NGO law to the latest dangerous tensions between Moscow and Tbilisi, in which the two sides sometimes seem determined to show that anything worth doing to one another is worth over-doing.

However, what I would like to sketch briefly is the positive side of our agenda, whose significance often gets lost today. One of its key elements is nuclear cooperation. As our two Presidents suggested in St. Petersburg last July, this is an area in which Russia and the United States have both unique capabilities and unique historical responsi-

“We both need to get used to the fact that we need each other; that we need to manage our differences better while still addressing them plainly; that we need to be as energetic in expanding common ground as we have been lately in voicing our frustrations.” much promise and much uncertainty, and a Russia with whom we are likely to enjoy partnership, as well as competition.

Many Russians tell me that the United States needs to get used to the fact that Russia has reemerged from the dependence of the 1990s, and that is fair enough. However, it seems to me that many Russians also need to get used to the fact that building open economic

bilities. We both have a stake in developing civilian nuclear energy, guarding against weapons proliferation and setting a responsible example for the rest of the world. Following the summit, we have embarked on an intensive effort to negotiate a bilateral agreement on peaceful nuclear cooperation, to merge President Bush’s global nuclear energy partnership and President Putin’s very similar proposal for international fuel centers and to reach a long-term under-

standing on access to the U.S. uranium market. Later this month, we will meet with other partners in a new global initiative against nuclear terrorism.

We have also begun a new strategic dialogue on managing our own nuclear arsenals, including the issue of what to do after START II expires in 2009.

Not least, we are continuing the crucial work — launched with such vision and determination by Senator Richard Lugar and former Senator Samuel Nunn fifteen years ago — to help ensure the safety and security of nuclear materials.

It will be a significant historical achievement if, as our Presidents have set as our goal, we have completed security enhancements at Russian nuclear facilities and storage sites by the end of 2008.

A second area of cooperation lies in conflict resolution and counter-terrorism. The United States and Russia have made quiet, but substantial, headway in recent years in strengthening mutual efforts to cut the flow of money to terrorist groups, to share intelligence, to coordinate law enforcement activity, and to combat the export of narcotics from Afghanistan. While we do not always see eye to eye on regional conflicts, in general our diplomatic coordination is valuable and systematic.

As I know from my own experience, the Quartet is a useful mechanism in grappling with the immensely difficult challenge of Arab/Israeli peace. As our two Presidents discussed earlier this week, our cooperation on the North Korea nuclear problem is very close and crucial to both our interests, as is our coordination on Iran.

A third area of cooperation that relates most directly to the work of the USRBC is the expansion of U.S.Russian economic ties through Russia’s integration into global economic institutions. As all of you know far better than I ever will, it takes a thick skin

and steady nerves to do business in Russia. Decision-making is often slow and opaque and can sometimes take disappointing turns, as recent Russian statements about the Shtokman gas project suggest. However, the rewards are also considerable for America as well as for Russia. American business is growing rapidly across Russia, the facts speak eloquently; U.S. direct investment in Russia rose by nearly 50 percent last year, much of it outside of Moscow.

I have seen first-hand the success of Alcoa in Samara; of International Paper in Svetagorsk; of Coca-Cola in its expanded plant in Krasnoyarsk; and of General Motors as it builds a new plant in St. Petersburg. Proctor & Gamble already employs more than 20,000 Russians, and its Russian business is

expansion will bring substantial benefits to Russia. All of these ventures are a reminder of what we have to gain by working together.

Russia’s integration into the global energy market — through everything from IPOs to downstream acquisitions — will help drive home the reality that the market, over time, rewards transparency and punishes opacity. The same dynamic applies to Russia’s entry into the world’s economic clubs. Over time, the discipline that comes from membership and from playing by established rules will help strengthen the rule of law in Russia. No accession process looms larger these days than Russia’s entry on fair commercial terms into the World Trade Organization. Accession would

“With all of the inevitable and sometimes frustrating ups and downs, there remains a solid, practical basis for partnership in the energy sector.” now four-fifths the size of its China operation. Boeing employs 1,300 highly skilled Russian engineers at its impressive Moscow design center, has just concluded a long-term $18 billion deal for the purchase of Russian titanium and is competing hard for a major aircraft sale to Aeroflot. Intel has its own research centers in Nizhny Novgorod and Novosibirsk. Much more is possible in the years ahead.

Next year, as Neville said, marks the 200th Anniversary of diplomatic relations between Russia and the United States. As many of you may know, John Quincy Adams was the first American envoy to Russia, and while the quality of ambassadors has gone straight downhill since then, the significance of our relationship has only grown. I have few illusions about the road ahead, but I am certain that Russia and America are going to need each other and matter to each other for many decades to come. I look forward to welcoming all of you back to Spaso House next year for the 200th Anniversary and I wish all of you every success in the meantime. Thank you.” n

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It is deeply in the interest of both of our countries to continue to expand economic cooperation. Economic ties bring their own practical benefits to both societies; they also help steady our relationship when other problems create turbulence. There is more that we can do to invest in our long-term economic relationship. One innovative initiative was announced by President Bush in St. Petersburg: a new foundation with

Twenty-four years in the American diplomatic service, split between Russia and the Middle East, have stripped me of most of my illusions. Nevertheless, I remain an optimist. Now whenever I say that, friends of mine in Moscow remind me that one of the many Russian definitions of an optimist is someone who thinks that tomorrow is going to be better than the day after. I mean something a little different from that. I think tomorrow is going to have no shortages of challenges as the United States and Russia adjust to new realities and construct a durable relationship.

However, I also believe firmly that we have a lot more to gain by working together than by working apart, and that we do not have the luxury of ignoring one another.

Russia Business Watch

With all of the inevitable and sometimes frustrating ups and downs, there remains a solid, practical basis for partnership in the energy sector. Despite recent controversy over Sakhalin, the ExxonMobil-led Sakhalin-1 project saw its first full tanker of oil depart Russia last week and expects to be producing 250,000 barrels per day by the end of the year. Lukoil and ConocoPhillips have a thriving relationship. Chevron has a significant stake in the Caspian Pipeline Consortium, whose early

greatly help to diversify the Russian economy and bolster the emergence of the middle class over time. After more than a decade of negotiations, a bilateral agreement is finally in sight. Its completion would do as much as any thing I can think of in the near term to strengthen our relations, encourage continued economic modernization through the crucial transition from President Putin to his successor and open up more opportunity for American trade and investment.

an endowment drawn from the remarkably successful U.S.-Russia investment fund, designed to support young entrepreneurs in Russia, business education and exchanges and the rule of law. The more the rule of law becomes ingrained in the economic system, the more it will shape the political system over time.

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PANEL

State Capitalism, Strategic Sectors & Foreign Investment

Moderator: Maurice Tempelsman

Chairman of the Board Lazare Kaplan International

Panelists:

Marshall Goldman

Richard Paterson

Senior Scholar Davis Center for Russian Studies, Harvard University

Global Energy, Utilities and Mining Leader PricewaterhouseCoopers

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Marshall Goldman opened the session with a discussion of the increasing state involvement in Russia’s economy, with an emphasis on the energy sector. He noted that the increasing prices for oil and gas since 2000 have helped Russia to increase production and export and have led to an economic resurgence in Russia.

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This rapid economic growth has made it possible for the Putin Administration to push out the old oligarchs, and for the siloviki to assert themselves. Once the siloviki are firmly in power, they will try to phase out production-sharing agreements (PSAs), since Russia simply does not need them, and will hire service companies to drill wells rather than dealing with foreign companies as equity partners. Mr. Goldman noted that it is unlikely that the state-owned companies will operate as efficiently as private enterprises, given that they are becoming overstaffed and unwieldy.

Renationalization has been underway in the energy sector for about three years, and has begun to spread to other sectors as well. Mr. Goldman recognized that foreign companies cannot avoid Russia due to the vast potential of the market. However, it is a market that involves a great deal of risk. Countries that have nationalized oil production have a long history of ignoring project agreements if they feel they do not need

Valery Nikulin

Vice President Russian Union of Industrialists and Entrepreneurs

William O’Rourke

President Alcoa Russia

them. Furthermore, it is hard to find a country that has demonstrated restraint regarding the nationalization of various sectors of its economy. Mr. Goldman noted that there is no lever or mechanism to prevent the Russian government from asserting control over other sectors.

Richard Paterson examined the impact that the growing role of the state has on foreign investment. He noted that foreigners will not be permitted to control new projects in strategic sectors, and that bureaucratic pressure on investors creates the threat and intent that current contracts may not be honored.

While the strategic sectors are ripe for quality investment and partnerships, investors proceed with great caution, if at all. Overall, the level of foreign direct investment (FDI) is significantly less than in other emerging markets — for example, FDI in Russia is 3.4 times

Richard Paterson, PricewaterhouseCoopers

Marshall Goldman, Harvard University

less than in China. Given Russia’s robust economic growth, FDI has not expanded to the level expected.

Mr. Paterson emphasized that the lack of FDI cannot justifiably be attributed to a lack of control by foreign investors.

In the case of oil and gas, the Russian government controls approximately 30 percent of oil production and 90 percent of gas production. It is not unusual for a government to seek control over its natural resources, as Saudi Arabia, Nigeria and Mexico control 100 percent of their reserves. Thus, control is not the main concern for investors, but rather the vehicles by which those reserves can be made available to foreign investors, and create a stable environment for investment. A consistent fiscal regime and the sanctity of contracts govern willingness to invest.

While the oil and gas sector experience a strengthening of government control,

the opposite can be seen with the utilities sector. The Russian government has approved the spin-off and privatization of two generating companies from Unified Energy Systems (UES), the state electricity monopoly. The UES strategy committee has approved the privatization of an additional 11 companies in 2007. UES will still maintain control over transmission facilities (getting electricity to the market) and distribution facilities (getting electricity to the consumer). Several European utility companies are interested in investing in these new generating companies, which could bring more FDI to Russia. On the other hand, foreign investors will likely have to compete with Russian companies such as Gazprom.

Mr. Paterson noted that the government has taken positive steps to encourage business and economic growth in Russia, and estimated that FDI would increase in the future. Russia has simplified the tax structure, released land ownership restrictions (which resulted in an increase in investment in the agricultural sector) and passed legal and judicial reforms — though the sanctity of contracts and legal recourse are still large concerns and barriers to an increase in FDI.

Valery Nikulin, Russian Union of Industrialists and Entrepreneurs

Valery Nikulin discussed U.S.Russia trade relations and the Russian government’s efforts to increase foreign investment. He highlighted some of the positive aspects of U.S.-Russia trade, noting the successes of Lockheed Martin, Boeing, Shell, ConocoPhillips, and Chevron in the Russian market.

Despite this progress and Russia’s impressive economic growth, trade between the two countries and FDI into Russia are not at an appropriate level given the scale of each country. U.S.Russia trade turnover in 2005 amounted to only about $19 billion. U.S. exports to the Russian market comprise less than one percent of imported goods, while Russian goods exported to the U.S. make up only three percent of imports. These numbers are miniscule compared to the economic potential of the two countries

Overall, Alcoa’s experience in Russia has been a positive one and the company has yet to experience any inappropriate political pressure. Although the political environment is stable, the decision making process is slow. The company has only faced the normal bureaucratic issues that all companies face when operating in a foreign country.

While Alcoa has had a constructive relationship with Russian companies and the government, Mr. O’Rourke noted that in order to increase Russia’s appeal to foreign investors, the government must increase predictability and stability, streamline the bureaucracy, fight official corruption, and more aggressively publicize the success stories of companies currently operating there.

Though Russia still has work to do, Mr. O’Rourke emphasized the enormous opportunities present and Alcoa’s willingness to continue to invest in Russia and its people. n

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Mr. Nikulin noted that the government has attempted to increase the appeal of the Russian market to foreign investors. The first improvement is the stability that has accompanied President Putin’s term in office. He added that corruption continues to be a problem, but it is more important to focus on the larger issue of political stability. A further effort to improve the investment environment includes tax reform

Mr. O’Rourke began with a discussion of Alcoa’s successes in Russia. He asserted that Alcoa has much to bring to Russia, including leadership, technology, people, and over 118 years of experience. He also affirmed Alcoa’s commitment to bettering the communities in which their two factories are located as well as the welfare of the workforce.

Russia Business Watch

William O’Rourke, Alcoa Russia

and a low tax rate. Mr. Nikulin noted that the Union of Industrialists and Entrepreneurs is lobbying the Duma for further tax reform. The Duma has also taken up discussion of the protection of foreign investment, and is expected to enact new laws in order to enhance the investment attractiveness of the country.

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ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006

PANEL

Perception & Misperception in Media Coverage of Russia and U.S.- Russian Relations

Moderator: Richard Edelman

President and CEO Edelman

Panelists:

Peter Baker

White House Correspondent The Washington Post

Richard Edelman opened the panel by noting that foreign media coverage of Russia is often only a relentless stream of negatives. Recent events in Russia provide fodder for such negative coverage of the Russian government: the murder of Anna Politkovskaya; Gazprom’s rejection of international partners for the Shtokman field; the fall-out from the government pressure on Shell’s Sakhalin project; and Russia’s delayed WTO membership. The media also tends to diminish Russia’s progress, as seen during the coverage of the G-8 Summit in St. Petersburg. Concerning the private sector, Mr. Edelman also noted that journalists negatively refer to the “Russia discount,” questioning Russian companies’ corporate governance, capital origins and potential mafia ties.

Mr. Edelman extended his concerns about negativity to the Russian media, and how it has influenced Russian perceptions of the United States. The Russian media wants to reaffirm Russia as an equal partner on the global stage and often portrays the United States as an impediment to that status. Stories appear in the Russian press demanding Russia’s right to supply nuclear technology to Iran, or threatening to ban U.S. poultry imports if Russia fails to secure WTO membership. Unlike the American media, though, the Russian media generally does not cover individual U.S. companies, so the negativity that it fuels is less company-specific.

Vladimir Pozner

President Academy of Russian Television

Peter Baker outlined the dichotomy that he experienced in Russia as The Washington Post’s Moscow Bureau Chief from 2000 to 2004. It was a time of profound change for Russia with evidence of prosperity and growth. A consumer culture rapidly took root as restaurants and retail space exploded across Moscow. By 2004, Moscow alone had expanded its shopping mall space ten-fold and doubled the number of cars on its streets. While Russia still contends with serious poverty, average Russians enjoy an economy of increasing stability, prosperity and choice. As Muscovites signaled a desire to invest in their homes, the changes spread to Samara, Yekaterinburg, Vladivostok, and other regions. This economic chain trickled out of Russia’s center, offering a dynamic and exciting development for business people.

Mr. Baker cautioned that Russia’s runaway success had another side to it. A stream of negative stories emerged that disheartened those who wanted to see Russia succeed and remain a great country. The consolidation of power by Vladimir Putin and the Kremlin were a central aspect of many of these stories.

From the beginning, President Putin made his intentions known. He created his new political order by manipulating elections, silencing opposition parties and driving out the oligarchs who dared to challenge him. The negative stories accumulated as Putin imprisoned Mikhail Khodorkovsky, took over YUKOS and eliminated the election of

Igor Zevelev

Washington Bureau Chief RIA Novosti

governors after the Beslan tragedy.

Mr. Baker noted that these stories were not only negative, but were difficult for the media to tell. These stories represent the changes happening in Russia, and consequentially, they can be politically or economically mixed in many ways. As a case in point, journalist Anna Politkovskaya was murdered in October 2006, but not before becoming a crusading reporter who defied every threat placed before her. If American media coverage wanes toward the negative, Mr. Baker asserts that they do so because of cases like Ms. Politkovskaya’s and the media’s obligation to tell the whole story.

Vladimir Pozner responded by stating that negative stories should not be confused with misconceptions.

Negative stories reveal an unfortunate truth, whereas misconceptions create false conclusions. In the case of Anna Politkovskaya’s murder, the American media fostered the misconception

Richard Edelman, Edelman

that her reporting angered the Putin Administration and was the cause behind her death. A recent article by The New York Times all but indicted the Kremlin as Politkovskaya’s executioner, without mentioning her enemies in the Chechen military.

Mr. Pozner noted that Russian journalist Dmitri Kholodov was murdered during Boris Yeltsin’s presidency.

Journalists court a certain degree of danger when they reveal the misdeeds of powerful people, and Anna Politkovskaya’s murder was thus not necessarily representative of the “New Russia,” or of the Putin Administration.

The American press is reporting misconceptions, rather than negative stories.

Amidst this backdrop of antiAmericanism, Mr. Pozner suggests that there is no need for Russian media to portray the U.S. in any particular way, since the negativity is not necessarily a misconception. America is perceived negatively in Russia, as are people who remain positive about the U.S. While he does not support President Putin or many of the developments in Russia today, Mr. Pozner stated that Americans need an interpretation of Russia that helps them understand Russia and what is happening in the country today.

Igor Zevelev opened his discussion of media coverage by quoting former U.S. President Thomas Jefferson, who wrote, “Nothing can now be believed which is seen in the newspaper; truth itself becomes suspicious by being put into that polluted vehicle.” Although Mr. Zevelev remains an advocate of the free press, he shares President Jefferson’s realist concerns about democratic passions.

In order to judge the media, three criteria prove useful — objectivity, fairness and balance. Mr. Zevelev posited that American media coverage of Russia

Russia was Europe’s great frontier, so the end of the Cold War and the collapse of the Soviet Union symbolized an “end of history” not only to scholars like Francis Fukuyama, but to journalists as well. Russia’s transformation would prove that Western values, norms and standards were universal. Russia had a role to play in the American intellectual mind, becoming another Estonia or Czech Republic opening its arms to democracy, free markets and the rule of law. When Russia did not follow the script of Central and Eastern European transformation, frustration and criticism of the government ensued. Perhaps not a misperception of Russian realities, it nonetheless reflected sincere disappointment as realities did not meet expectations.

Mr. Zevelev noted that there may have been a misunderstanding about Russia’s immediate future, and that is reflected in the pattern of media coverage on Russia. A significant portion of the

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Mr. Pozner outlined a history of misconceptions about Russia that dates back several centuries. Western Europe looked upon Russia as a strange country that emerged from the Tartar occupation as a dark, mysterious land that was different from the rest of the world.

The Cold War perpetuated Western misperceptions of Russia as different and even dangerous. Most Americans and Russians alive today grew up during the Cold War, and therefore many of them still live with these skewed

Regarding Russians’ perceptions of Americans, Mr. Pozner warned that anti-Americanism in Russia today far outweighs that of the Soviet era.

Russians have little interest in America anymore, and generally view the U.S. as an aggressive superpower that throws its weight around, disregards the interests of others and forces its views on the rest of the world.

does not presently maintain these three elements. He acknowledged that the reasons may involve journalists’ beliefs and experiences — the lens through which they individually see Russia.

Misperceptions of Russian may also prevail for reasons we cannot detect or understand, but the main reason is the American media’s unrealistically high expectations for Russia’s democratic transformation in the early 1990s.

Russia Business Watch

Mr. Pozner emphasized that President Putin does not devote a great deal of attention to the actions of journalists.

The print press is relatively free, and includes communist and fascist newspapers. Other extreme positions exist on radio and local television. However, Mr. Pozner made a clear differentiation between local television and network television. While Moscow may tolerate extreme positions in other venues, it exercises serious control on network television due to the large number of people that can be influenced by it.

The latitude given to radio and newspapers reflects the cynical attitude toward such media’s popular impact in Russia.

perceptions of each other. Many Americans have an almost “Pavlovian reflex” to simplify Russia’s changes today as “going back” or reverting to previous systems, such as communism.

Whether referring to Putin or the oligarchs, the average American often fails to explain what is happening in Russia in today’s terms.

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17 Vladimir Pozner, Academy of Russian Television

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ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 U.S. media coverage of Russia is based on the assumption that President Putin is weakening democracy in Russia. The media created a storyline in which Mr. Putin’s regime would ultimately restore traditional Russian autocracy again after a brief period of democracy in the 1990s. Despite these accusations from U.S. journalists, 85 percent of Russians support President Putin and his policies. Clearly, a majority of Russians would not support a leader whom they thought as oppressive.

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Mr. Zevelev pointed to two possible explanations for this misperception. First, it may be that the state of democracy and personal freedom in Putin’s Russia is not as bad as the U.S. media portrays it to be. However, data of public opinion in Russia does not support this argument. It shows that Russians are very tough graders of the state of democracy in Russia, and they score Russian democracy poorly.

Although many Russians believe that Russia is far from a democratic state, they would prefer to slowly move in this direction under Putin, rather than return to the chaos of the 1990s.

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As a second explanation, one could suggest that Russians care less about democracy than stability, economic growth and the restoration of Russia’s great power status. Russians view Putin as a leader who returned this sense of strength, development and international influence to Russia.

Mr. Zevelev noted that elements of truth exist in both arguments.

However, the media coverage of Russia’s system of government does not correspond to what most Russians think about it. In economic coverage, Mr. Zevelev predicts that the American media will follow what he terms to be the “Chinese model”: Russia will be portrayed as a country of great opportunities for U.S. businesses, but also a competitor whose business practices

and the role of the state in the economy are different from what is known in the Western experience.

In the political sphere, some journalists will follow a “Kazakhstan model” while others use a “Belarus model” for reporting on Russia. Under the Kazakhstan model, emphasis will be placed on the two countries’ common interests, while perceived differences in democratic standards are downplayed.

Those utilizing the “Belarus model” will place emphasis on the growing authoritarianism of President Putin’s regime.

Mr. Zevelev concluded by noting that it is doubtful that journalists could be absolutely objective, fair and balanced when reporting on a foreign country. Journalists’ beliefs about the world, their experiences and memories, expectations, and political preferences will always color reports and analyses.

However, it is important to understand the reasons for certain patterns of perceptions and misperceptions.

Ultimately, the gap between expectations and the evolving realities in Russia may constitute the primary reason for the many misperceptions of the country today.

Question & Answer Session Peter Baker described his experience as reporting the reality of what he saw, while Igor Zevelev gave a perception vs. reality kind of argument. Peter, can you respond to Igor’s assertions?

Mr. Baker noted that many outsiders to Russia fall into one of two camps — the optimists and the pessimists. Those who experienced Russia during the dark days of the 1970s under Brezhnev became the optimists, and they applauded the developments of the last 15 years. The pessimists, who largely went to Russia in the early 1990s, expected Russia to emerge as a fully matured and evolved democracy.

Mr. Baker agreed that it is impossible to be completely objective and unbiased in journalism, despite the notion that it is a requirement. U.S. journalists write from an American point of view and for an American audience, which will undoubtedly shape how news is covered. He emphasized that it is important to try to present as real a picture of Russia as possible, so that people have a more informed understanding of different aspects of what is happening in Russian society.

Mr. Pozner, you talked about the New York Times piece in today’s newspaper about the murder of Anna Politkovskaya and you suggested that it was quite focused on Mr. Putin.

Can you expand on that a bit?

Mr. Pozner answered that the New York Times’ article does not present the differing viewpoints on what happened in the Politkovskaya murder, which is how journalists are supposed to report the news. There is nothing about who might have committed this crime and why they might have done so aside from several quotes blaming the government. He reiterated that negative stories are not the central issue, but rather that several viewpoints are presented in an article. The media needs to give its readership a broader view of events, and when they fail to do so, these misperceptions arise.

Mr. Pozner added that, in the 1990s Russia was rapidly spiraling out of con-

Peter Baker, The Washington Post

trol, but there was less and less interest in Russia on the part of the U.S. media.

No major U.S. media company maintains a news bureau in Russia today, with the exception of a small NBC bureau.

Mr. Zevelev, your comments were almost totally about the government and politics, yet the coverage of companies is negative as well. Do you have any views about why?

Mr. Zevelev noted that the New York Times’ coverage of Anna Politkovskaya’s murder reflects a broader pattern of simplistic understandings about today’s Russia. If something happens in Russia,

PANEL

pendent actors, who have their own interests.

Igor Zevelev, RIA Novosti

good or bad, it is supposedly the result of some decision made by President Putin. There is a lack of understanding that Russia is a very complex country and society with numerous semi-independent or sometimes completely inde-

Mr. Zevelev believes that the U.S. media coverage of the Russian economy is balanced and fair. However, when comparing the economic and political sections in The Washington Post, it sometimes appears that these reports are about different countries. Political sections tend to be fairly negative, while economic sections remain balanced and fair. However, there is a real concern about the so-called “national champions.” This is where the economic coverage becomes negative. n

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Technology Development & Innovation

Moderator: Lou Naumovski

Sr. VP and GM, Russia and CIS; Head of Strategy and Business Planning, CEMEA VISA International Service Association

Panelists:

Cathleen Campbell

Owen-Christopher Kemp

President and CEO U.S. Civilian Research & Development Foundation (CRDF)

William Farley

Director, Strategic Global Collaboration ChemDiv, Inc.

Vice President and Managing Director, HP Russia Hewlett-Packard Company

A key concern for the long-term success of U.S. companies in Russia is ensuring a constant flow of talent. Securing this talent through additional training and education is a priority. CRDF has

Winter 2006-2007

Entering the Russian market and finding partners can prove a daunting task

due to the difficulties of navigating the bureaucracy, establishing payment mechanisms and adjusting to local customs and practices. While CRDF faced similar problems when it first entered the Russian market 11 years ago, the company has set up government and banking networks that have permitted it to implement programs and import equipment and payments into Russia.

Russia Business Watch

Cathleen Campbell began the panel by noting that the U.S. Civilian Research & Development Foundation’s (CRDF) programs and services — such as funding research — have evolved and are adapting to new opportunities by bringing together scientists and commercial partners. CRDF’s financial support and efforts to partner Russian scientists and entrepreneurs with American businesses have helped to move research into the market place, resulting in new patents and commercial ventures.

19 Cathleen Campbell, U.S. Civilian Research & Development Foundation (CRDF)

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ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 the creation of special economic zones to provide customs and tax breaks to companies that open operations in Russia.

Lou Naumovski, VISA International Service Association

partnered with the Ministry of Science and Education to establish 16 research and education centers at 19 universities across Russia. At these centers students and faculty have access to state-of-theart equipment and an opportunity to research and to benefit from training management and technology transfers.

Under this partnership four technology transfer offices have been established, and four more are expected to open by the end of the year.

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Building world class research universities is one way that Russia is trying to create a better environment for technology development and innovation.

A positive trend has appeared with increased research and development investment from the public sector, and there is hope that greater private sector investment will follow in the near future.

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Russia is also undertaking several initiatives to ensure greater technological development and to create a more attractive investment environment.

The government is supporting small businesses — primarily through the Foundation for Assistance to Small and Innovative Enterprises — and is in the process of creating technology parks to increase incentives for research and development in the high-tech fields.

Other public sector efforts involve the establishment of venture funds for new businesses focused on technology development and innovation, as well as

Owen-Christopher Kemp began by emphasizing the recent growth in Russia’s IT market and positive developments such as the creation of technoparks and special economic zones to attract foreign investment. A large pool of technically educated workers and a government that is increasingly interested in the advancement of the IT industry are trends that will ensure future growth in the sector. Mr. Kemp noted that the Russian government will invest approximately $2 billion in the sector in 2006.

A more developed R&D and technology sector in Russia creates greater opportunities for Europe, the Middle East and Africa. Companies in these regions will be able to outsource business processes to Russia, rather than more distant locales such as China or India. The globalization of Russian companies, the influx of FDI and mergers and acquisitions also create opportunities for companies to address outsourcing and off-shore prospects.

While Russia is ripe with potential, some risks and constraints do exist.

Infrastructure, customs and encryption regulations have been issues for most foreign companies. It is difficult for a company to export products that it

Owen-Christopher Kemp, HP Russia

William Farley, ChemDiv, Inc.

manufactures in Russia, while distributing products throughout Russia is also not an easy task. The human resource issue has presented another obstacle to growth in Russia. It is becoming increasingly difficult to recruit and retain talent in Moscow and St. Petersburg due to the intense competition among companies for skilled labor.

As a result, many companies are looking to the regions where talent is easier to recruit and to retain.

William Farley concluded the panel with an illustration of the potential for high-tech innovation in Russia as evidenced by the recent successes of ChemDiv in the R&D field. He noted that the company was able to purchase a dilapidated office building from the Russian military in 2002, and in just two years convert it into a state-of-the-art research and development center that employs over 450 people. The local and federal governments were instrumental in decreasing the bureaucratic barriers to making the investment, and helped to shorten the lead-time for the project. This example is indicative of the opportunities available, especially given the tax advantages available in the new special economic zones.

Russia also benefits from a large pool of experienced researchers and a reverse brain-drain of scientists with advanced degrees who can fill middle-level and top management positions. These scientists are producing creative scientific research, not merely reproductive science, and are contributing signifi-

cantly to the development of high-tech research in Russia. Mr. Farley noted that the cost of establishing a research laboratory in Russia is about 40 percent less than in China or India. Coupled with the rapidly decreasing cost of

ROUNDTABLE

capital, Russia becomes an extremely attractive country in which to conduct research and development programs.

Mr. Farley highlighted the future growth potential of Russia’s IT market,

noting that the large pool of talented personnel, the reverse brain-drain and the prevalence of innovative scientific research taking place in Russia is proving to be a significant attraction for foreign investors. n

Russia’s Energy Future and the U.S. Role In It

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Moderator: Daniel Yergin

Chairman Cambridge Energy Research Associates

Panelists:

James Mulva

Rex Tillerson

Chairman and CEO ConocoPhillips

Claudi Santiago

President and CEO GE Oil & Gas

Chairman and CEO Exxon Mobil Corporation

Given the complexities of operating in Russia, what are the main things you have learned in terms of project execution?

Mr. Tillerson responded that, understanding the challenges from the beginning, Exxon decided to divide the Sakhalin-1 project into smaller pieces to ensure a greater chance of success. By breaking up the project, the company learns a great deal more throughout the

process, resulting in a more cost-efficient and manageable venture.

Have you experienced any cultural issues in cooperation between ConocoPhillips and LUKOIL, and how do you address them?

Rex Tillerson, Exxon Mobil Corporation

Mr. Santiago stated that Russia’s infrastructure is outdated. Due to outdated equipment, pipelines and transportation infrastructure, Russians consume two to three times more energy per dollar of GDP than other developing countries. Investment in pipeline upgrades,

What do you think about the recent developments in the Shtokman project?

Mr. Tillerson noted that Gazprom has the ability to develop this project without partnering with other energy companies. The project is technically and commercially challenging because of the Shtokman field’s location in the Arctic Circle and because of the new technology needed to make it com-

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How do you assess the state of Russian infrastructure compared to other parts of the world?

Mr. Santiago added that investing in equipment and pipelines is not seen as a priority. Part of the problem is the amount of time that it takes to make a decision about upgrading infrastructure and follow through with it. The nature and extent of Russia’s bureaucracy means that any decision on investment in infrastructure takes a great deal of time to be reached and implemented.

Russia Business Watch

Mr. Mulva noted that cultural similarities and differences exist and that the companies have to work from the top down in order to overcome any cultural barriers that may arise. Language is a major issue in the early stages of cooperation, and when this is no longer a problem working together will be much easier.

compression stations and all the equipment involved in energy transportation and use has to be a priority for Russian companies.

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mercially viable. While ExxonMobil respects Gazprom’s decision, the company remains interested in all facets of Russia’s energy sector, and would be interested in participating in the development of the project, as would other companies.

the partnership and, at present, there is no indication that they are willing to do so.

What are you looking for in terms of the quality and the nature of decision-making in the energy sector in Russia? Stability?

Timeliness?

Are ExxonMobil and ConocoPhillips interested in new projects in Russia? What are the characteristics your companies are looking for?

Mr. Tillerson stressed that ExxonMobil is interested in new opportunities for resource development in Russia. The company has a great deal of experience and expertise to add even to existing fields, but it seems in some cases that the Russian government does not recognize the additional benefits that Exxon can bring to a project.

Many in the leadership feel that they are capable of conducting these projects on their own, acquiring the various new technologies and expertise needed to develop the technically complicated fields from individual contractors.

However, the most difficult aspect is not acquiring the technology, but integrating the technology into established practices and techniques. Until Russian policymakers recognize Exxon’s added value of technology integration, the company will only be considered for opportunities similar to what it has

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22 Claudi Santiago, GE Oil & Gas

James Mulva, ConocoPhillips

faced in Sakhalin: remote, complex projects.

Mr. Mulva agreed that ConocoPhillips is always looking for new opportunities, but added that since many of these new opportunities are $10-20 billion projects, a number of participants is needed to spread risks. In addition, no one company has the ability to be the best at every single part of the integrated chain of building a project, so it makes sense to seek partners for projects on this scale.

Would you agree with the statement that Russia ranks lower for businesses looking for opportunities that it did a few years ago?

Mr. Mulva responded that each country has its unique risks. With respect to Russia, ConocoPhillip has worked primarily with LUKOIL, and the company has had a very positive experience in this partnership.

Mr. Tillerson added that since Russia is still a resource-rich country, companies are still interested in finding new opportunities there. These resources are harder to access because of location and costs, but their abundance will ensure continued interest from energy companies. He added that ExxonMobil has the ability to replicate the success it has had with Sakhalin in other locations, but the Russians have to initiate

Mr. Tillerson emphasized that Russia needs to decide on the rules of the game for investing in the energy sector and to stop changing those rules. The time, risks and costs involved in these projects are tremendous, and when the government continues to change the rules it is difficult to assess the attractiveness of a project and then to commit the billions of dollars required to develop it.

Mr. Santiago identified three elements that he looks for in Russia. The first is faster decision-making; Russia is too slow and bureaucratic. The second is a clearer, more transparent and more established rule of law. Billions of dollars are invested, and investors want to be protected by the law. The third is improved business practices and compliance needed to reassure the Western world when investing such significant amounts of time and money.

Do you see Russia missing the window of opportunity for capturing a share of the liquefied natural gas (LNG) market?

Mr. Santiago answered that it is still unclear if Russia will lose a major opportunity in the LNG market, but he noted that many companies and countries around the world are making decisions on and following through with major projects, so a limited window of opportunity exists. He added that these types of decisions take much longer in Russia, which could hamper their ability to capture a share of the market.

Mr. Tillerson averred that the question should not be whether Russia will

miss an LNG opportunity, but rather will Russia miss the opportunity to capitalize on their natural gas resources.

Russia is not well positioned to participate in the LNG market because of the remoteness of its resources and due to the delivery costs from Russia being higher than from other countries. The best way for Russia to capitalize on its natural gas reserves is through pipelines.

Europe and Asia are going to continue to import and to demand gas, and if Russia does not supply these markets, others will move in instead. Given that Russia is contiguous to these markets, it makes more sense to emphasize pipeline delivery than to invest in LNG facilities.

As you look for new opportunities, is access to reserves more of a problem?

Mr. Tillerson responded that ExxonMobil can only develop what it has been given access to, and so far the company has been given access to places where the water is deep and the climate is harsh. There are easier places to develop resources, but the company has not been allowed to develop these areas. ExxonMobil intends to go wherever it is allowed to work. Where the company is not allowed to go, it will try to inform the authorities of the benefits

Is the world running out of oil?

Daniel Yergin, Cambridge Energy Research Associates

that the company can bring to a project and the implications for their own energy security.

Mr. Mulva asserted that access is more of an issue now due to increased competition. In order to maximize the value of a country’s resources, it can bring in outside companies, or it can develop these resources itself. The role of international oil companies could change if they only have access to seven or eight percent of known resources.

If companies do not have access to explore and to produce, it is possible they will take on more of a mid- or downstream role.

Mr. Tillerson noted that, according to the U.S. Geological Survey, the world endowment of conventional oil is 3.2 trillion barrels, with an additional one trillion barrels of unconventional oil.

To date, one trillion barrels of oil have been produced, leaving three times as much remaining as has been consumed.

Clearly, the resource base is adequate, but how those three trillion barrels are developed and delivered depends on the kind of access companies are granted, investment levels and the types of technology available.

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Mr. Santiago agreed that the resources are plentiful. It is common knowledge that reserves are being depleted faster than new ones can be developed, but this is a niche that technology can fill.

Technology has enabled companies to develop resources that were considered unreachable just 10 to 15 years ago.

The major concern today is not of the abundance of natural resources, but of the insufficient number of trained and experienced workers in the industry.

Mr. Mulva added that more attention must to be placed on the efficient use of energy, prolonging the finite resource. n

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PANEL

Market Dynamics & New Avenues for Investment

Moderator: John Cahill

Executive Chairman The Pepsi Bottling Group

Panelists:

Terrence English

Arthur George Partner Baker & McKenzie

Andrey Kolosovskiy

Alexander Nenashev Director Department of Regulation Oversight Russian Agency for Special Economic Zone Management

Director

Baring Vostok Capital Partners

President, IntrConsult and Executive Committee Member Delovaya Rossiya

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Terrence English, Baring Vostok Capital Partners

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Mr. English started the discussion by providing an overview of the private equity market. The investment strategy from 1994 to 1998 was to make any possible investment, because all assets were appreciating. After the financial crisis in 1998, though, the situation changed. Most foreign investors left and those that remained had to compete with Russian investors. From 2003 to 2006, there has been a rapid growth of companies, but most of these companies are much smaller than those that emerged in the early and mid-1990s. In Russia today, there is a core of foreign players who are adept at working in the market, but there are also very capable Russian players as well.

To illustrate the growth occurring in the

country today, Mr. English turned his attention to the advertising and retail sectors. Russia was the 6th largest market in Europe in 2005, up from 20th in 2000. Growth is taking place not only in Moscow and St. Petersburg, but in the regions as well. However, this sector has a boom and bust cycle, and it is important to watch oil prices, because natural resource revenue provides the liquidity driving these markets. The retail market is also rapidly expanding, and consumer spending and sales are expected to increase through 2015.

Much of the investment in the retail industry goes toward developing retail space; companies are vying for prime spots.

Alexander Nenashev, Russian Agency for Special Economic Zone Management

Michel Perhirin Chief Executive Officer MDM Bank

John Cahill, The Pepsi Bottling Group

Mr. Nenashev continued the discussion with a detailed overview of the new special economic zones (SEZs). Special economic zones are a national priority for the Russian government, and several ministries have combined efforts to ensure the success of the project.

However, without a change in attitudes toward innovation, the introduction of higher technologies into the market and the development of the transport infrastructure, this project will not be successful.

Three categories of SEZs have been created: Industrial Manufacturing, Technology Development and Tourism and Leisure. The Russian government expects these projects to aid in the shift toward a high-tech economy that is

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Arthur George, Baker & McKenzie

driven by innovation and the commercialization of new technologies. The authorities also expect an improvement in the investment and entrepreneurial environment within these zones.

Special economic zones serve as a tool to help social conditions improve. The technology zones will be useful for rectifying the disproportionate development of the regions.

The management of the SEZ is undertaken in part by the Federal Agency for Special Economic Zone Management and in part by a Supervisory Board that coordinates all operations within these zones. The Supervisory Board includes representatives of the Federal Agency, regional and state authorities and SEZ residents.

As a result of the improving legal climate, mergers and acquisitions activity has increased, as well as the pace of initial public offerings. A boom in the information technology (IT) and telecommunications sectors was also aided by the improvements to the legal environment.

Mr. Kolosovskiy stated that while there has been tremendous progress reforming the country in the last 15

years, basic economic and structural problems have still not been resolved.

Some of these problems include the market damage done by monopolies and the different rules for businesses in various regions. Corruption and insufficient property rights make investment less attractive and make business less competitive, while social issues, particularly the income gap, are of concern to businesses.

With the realization of all that needs to be done, businesses and government officials are switching from a crisis economic policy to a development economic policy. In an effort to make changes, four projects have been labeled national priorities: affordable housing, education, national health, and agricultural development.

Mr. Perhirin discussed the devel-

Winter 2006-2007

Mr. George noted that a new IT programming regime would come into force in 2007 that applies to Russian enterprises engaged in software development. The IT regime is export oriented, requiring 70 percent of revenue to be from foreign customers. The benefits are similar to those provided in the Technology Development SEZ, including unified social tax reductions and deductible expenditures on equipment, among others. For larger companies, the special economic zones should provide more opportunities for savings, while the IT regime is a better choice for smaller firms due to the impracticality of the procedures and investments in SEZs.

Andrey Kolosovskiy, Delovaya Rossiya

Russia Business Watch

The SEZs have an area of no more than 20 square kilometers, with the exception being the technology zone, which has an area of 7 square kilometers. These zones cannot be in the territory of certain municipalities or in residential zones and should not include all of the territory of any administrative or municipal district. The extraction or processing of natural resources and scrap metal are prohibited in the zones.

No metallurgy enterprises are to be developed and special license products are not to be manufactured, with the exception of automobiles. Special economic zones are to be established on

Mr. George shifted the discussion to the changes in the legal environment that will benefit market development, such as the proposal to eliminate the dividend tax for Russian enterprises.

He noted that the law is politicized in some areas, but has not been a factor in most foreign investments. The implementation and interpretation of laws has improved, and in most cases, the court system is fair and unbiased.

However, the enforcement of foreign arbitral awards needs to improve outside of Moscow and St. Petersburg.

25 Michel Perhirin, MDM Bank

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 opment of Russia’s banking sector, and the necessary changes that must be made in order to ensure that the country’s economy continues to grow.

He noted that it is easy to raise funds in Russia today, either through equity markets or debt capital markets, but added that the banking system is facing a difficult challenge. The sector has greatly improved in all respects over the last decade, but few Russian banks are maturing today. Almost 90 percent of

all banking business in the country is conducted by 30 banks. Over 67 percent of banking is done by state banks, while private Russian banks account for 25 percent and foreign and regional banks make up the remainder.

The challenge now for the banking system is how to continue to help the economy develop, as banking assets have reached 50 percent of GDP. With the current structure of the sector, it

will be difficult for state banks to raise capital, since they are not altogether profitable. Russian banks have no choice but to reorganize themselves and become more linked with international financial markets, which will be the only way to raise significant amounts of capital. They must become more transparent, comply with accounting standards, mature, and deliver what investors and financial partners expect in order to attract investment. n

Northern Virginia | March 27-28, 2007 Doubletree Hotel* 7801 Leesburg Pike Falls Church, VA *(soon to be the Westin Tyson’s Corner)

The U.S. Civilian Research & Development Foundation presents the Eurasian Innovation & Investment Forum in Northern Virginia on March 27-28, 2007.

HIGHLIGHTS AND SPEAKERS

Russia Business Watch

Winter 2006-2007

Highlights and Speakers include: 12 Eurasian companies with market-ready technologies in the IT, environmental energy, and civilian security sectors

26

Aneesh Chopra Jay Cohen

Secretary of Technology, Commonwealth of Virginia Under Secretary for Science & Technology, Department of Homeland Security

George Crosby

Former CEO, Philips Electronic Instruments

Woody Hall

SVP, Homeland Security Programs, SAIC

EVENT ORGANIZERS

w w w. innovationforums .org

PANEL

The Government Relations Portfolio in Russia

Moderator: Paul Rodzianko

Advisor Access Industries

Panelists:

Kern Briggs

Denis Gudym

Sergey Kolmakov

Director, International Government Affairs Director, Political Affairs

Eli Lilly and Company The PBN Company

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006

Government Affairs Manager Intel Russia & CIS

Mr. Kolmakov initiated the discussion by noting that no legislation exists to establish the rules and procedures for lobbying in Russia, contrary to the United States, where the profession is well established. The lack of a legal framework for lobbing activities is not unique to Russia, as they are absent in most EU countries as well. He added that, although there is no formal legal basis for lobbying in Russia, the activity is increasingly necessary.

Lobbying has no legal status due in part to the fact that, in the early 1990s, the state was weak and the oligarchs, regional barons and political parties

who played a significant part in forming legislation had no interest in codifying the practice. Today, the state is a much more formidable player in the dialogue among interest groups, and has concentrated the decision-making process so that, in certain industries, only two or three people make the key decisions.

In the oil and gas sector, for example, President Putin effectively functions as the manager of the resources, while ministers act as facilitators of the political will. Often, the CEOs of Russian oil and gas companies function as facilitators, who supply information to the decision makers and who influence strategic decisions, but they are not key

Mr. Gudym continued the discussion with an overview of the methodologies used in government relations work in order to effectively lobby the state.

He noted that all businesses start with public permission and public approval and that the government is only one of several stakeholders. Those who work in government relations should define and analyze the interests of the company; monitor the activities of policymakers and regulators; and coordinate and communicate between companies, business groups and government bodies in order to exert influence on these groups. In this way, the company can either take advantage of opportunities or change some of the concerns investors still have when dealing with Russia.

Winter 2006-2007

Businesses are able to exert influence on the government in a variety of ways.

By meeting with the official involved in the issue with which the company is concerned, direct influence can be applied. Another method is to work through non-governmental organizations (NGOs), industry groups and professional organizations. Think tanks can be an effective tool to aid in advancing a company’s interests with the government. Think tanks

Russia Business Watch

Sergey Kolmakov, The PBN Company (l.) and Denis Gudym, Intel Russia & CIS

figures in the process. The key to lobbying in Russia is knowing which person can make what level of decision.

27

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006 own expertise that the government needs, and can be employed to conduct research that could support the argument that a company is putting forward.

Mr. Briggs added the healthcare industry perspective to the discussion. He noted that the increasingly centralized nature of the healthcare system, the growth of the bureaucracy and a lack of transparency in decision-making creates a difficult environment for effective GR work in the sector.

Russia Business Watch

Winter 2006-2007

Mr. Briggs noted the importance of developing relationships with key figures in the sector, from government decision makers to allies in the domestic industry. It is also important to broaden stakeholder input through grassroots advocacy, especially in the nascent stages of a specific GR campaign. In many cases, GR strategies should focus on the long-term view in order to be most effective at producing the desired results. It is also important to utilize

28

Kern Briggs, Eli Lilly and Company

trade associations and other local associations, and to integrate efforts with the company’s GR offices in other key cities, especially Washington and Brussels.

For an international company in Russia, a successful GR strategy must be combined with building a strong company brand image. Companies must develop an effective public relations campaign in order to position themselves with key decision makers, as well as form partnerships with the government when possible. It is also important to have a system in place to track external relationships to ensure accountability and that the message is consistent.

Question & Answer Session How do you find the right person to talk to and how do you know what decision that person is capable of making?

Mr. Kolmakov answered that it is critical to have a map of decision-makers in each sector so that you can understand the matrix of priorities and rank of the caliber of decisions that a certain level of government can deliver.

Mr. Gudym added that it is important to hire people who are capable of gathering and analyzing information relevant to government relations efforts. In many cases, it is preferable that these analysts are locals as they are generally more capable of assessing the decisionmaking process and understanding how

Paul Rodzianko, Access Industries

it works. Cultural differences exist in the formation of policy, and it is important to enlist people who understand this process in order to formulate an effective strategy.

Is there a balance between activities in the center and in the regions?

Mr. Briggs noted that the regions are important to the healthcare sector in particular because 30-40 percent of business in done there. For this reason, it is important to form close relationships with governors and regional healthcare authorities. There is a clear intersection between the regions and the center since, in most cases, the center supplies the regions with a large share of their revenue. The focus of GR work in the healthcare sector, though, is trending toward the federal government due to the increased centralization of the sector. n

Secretary of Commerce Carlos Gutierrez talks with Janet Howard, The Coca-Cola Company.

Maurice Tempelsman, Lazare Kaplan International, queries Ambassador William Burns.

Nicholas Burns delivers the Gala Dinner keynote address.

Nicholas Burns (l.) talks with Neville Isdell (c.) and Gene Lawson.

Gene Lawson (l.) with Peter Pettibone, Hogan & Hartson, (c.) and Ambassador Frank Wisner, AIG.

Galen Cobb, Halliburton, (l.), John Rauber (c.), and H.J. Markley, Deere & Company, enjoy the reception.

Ambassador Yuri Ushakov (l.) with Stephanie and Gene Lawson and Ambassador Frank Wisner (r.).

Jeffrey Hirschberg, Kalorama Partners (l.) talks with Ambassador Pickering (c.) and Gene Lawson.

Ambassador Pickering discusses U.S.-Russian relations at the Gala Dinner tribute.

Winter 2006-2007

Ambassador Yuri Ushakov welcomes Annual Meeting participants.

Russia Business Watch

Neville Isdell, The Coca-Cola Company, gives the opening address.

Annual Meeting

ANNUAL MEETING 2006 New York, NY nn October 11-12, 2006

29 George Siguler, Siguler Guff & Company, LLC, (l.) and Lisi Kaufman, United Technologies Corporation (r.).

activities

USRBC calendar of events OCTOBER 5 Coalition for U.S.-Russia Trade organizes a private sector briefing with USTR’s lead negotiator on Russia’s WTO accession, Dorothy Dwoskin, Assistant USTR for WTO and Multilateral Affairs.

5 Council hosts a briefing with James Lambright, Chairman and President of the Export-Import Bank of the United States.

11-12 Council hosts its 14th Annual Meeting of Members and Directors, “Navigating a Resurgent Russia” in New York City.

24 Council hosts farewell dinner for Executive Vice President Blake Marshall.

25 Coalition for U.S.-Russia Trade Steering Committee members meet with USTR’s Laurie Molnar, Director for European and Mediterranean Trade Issues.

30 Council welcomes Brian Cox as its new Executive Vice President.

13-14 Council Program Manager Jeff Barnett speaks on the status of Production Sharing Agreements at Russian Petroleum Investor’s 4th annual conference, “Investing in Russian Oil and Gas Assets” in Moscow.

OCTOBER 19-20 Council Executive Vice President Blake Marshall participates in Renaissance Capital’s 5th Annual Investor Conference, “Russia: New Role in a Changing World” in New York City.

OCTOBER 30 Members of the Coalition for U.S.-Russia Trade Steering Committee meet with trade policy staff of Rep. David Dreier (R-CA).

NOVEMBER

Russia Business Watch

Winter 2006-2007

14 Monthly members’ roundtable with Tom Graham, Special Assistant to the President and Senior Director for Russian Affairs at the National Security Council.

30

16 The USRBC holds a member briefing on Russia’s accession to the World Trade Organization with Stephen Hanson, Associate Professor of Political Science at the University of Washington; Philip Hanson, Professor of Political Economy at Birmingham University (England); and Peter Rutland, Professor of Government at Wesleyan University.

NOVEMBER

DECEMBER

30 The USRBC hosts a member luncheon with Alexander Medvedev, Deputy Chairman of Gazprom and Chairman of Gazexport.

6 The Council hosts a dinner in honor of Igor Shuvolov, Aide to the President of the Russian Federation and Russia’s Sherpa to the G-8.

On November 16, 2006, Stephen Hanson, Associate Professor of Political Science at the University of Washington, Philip Hanson, Professor of Political Economy at Birmingham University (England), and Peter Rutland, Professor of Government at Wesleyan University, briefed Council members on Russia’s World Trade Organization (WTO) accession and globalization.

Stephen Hanson began by noting that Russia’s WTO accession negotiations have been impacted by a history of poor timing. Mikhail Gorbachev was interested in joining the WTO, but the Soviet Union collapsed before serious negotiations could begin. The severe economic decline in Russia that followed the break-up of the Soviet Union precluded any notion of joining the world trade body.

China’s accession to the WTO in 2001 despite extremely weak intellectual property rights (IPR) protection has also hampered Russia’s efforts to accede. As part of the accession process, the Chinese government had

promised increased IPR protection, but the failure of that government to follow through on those promises had lead IPR proponents to cast greater scrutiny on Russia’s efforts in that area.

Russia has drawn close to joining the WTO, but several political obstacles still need to be resolved. The United States must repeal the Jackson-Vanik Amendment, Europe still has to negotiate fees for flights over Siberia, Poland and Lithuania have some reservations about Russia’s energy policy, and Georgia still has to sign a bilateral agreement with Russia. Another complication is the renationalization of certain sectors of Russia’s economy — a move that might erode the country’s strong economic reputation.

Philip Hanson added that, despite Russian fears that more competition brought on by WTO membership will decrease employment and industrial output, WTO membership will help liberalize non-strategic sectors and will bring Russia into a serious international organization with a definitive relationship. Some sectors — such as

aerospace and oil and gas — have been renationalized, but through joint ventures and alliances, this policy approach is not completely exclusionary. Overall, the effect of accession on the economy would be modest, because only 1/5 of the economy would be affected.

activities

USRBC Briefing on Russia, the WTO and Globalization

Peter Rutland continued the discussion with an examination of the energy sector. He noted that the sector comprises over 20 percent of Russia’s economy, and will only minimally be impacted by WTO membership. The greatest barrier to foreign direct investment in energy is not the WTO, but political issues. U.S. and Russian administrations have played a high stakes game with WTO negotiations; neither wanted to say yes nor did they want to say no. Additionally, investment becomes political because there are clear winners and losers from WTO accession. With respect to regions and to sectors, regional inequalities are likely to be further exacerbated, because most foreign direct investment goes to the Far East or Northwest in the case of the energy sector, for example. n

USRBC Briefing with James H. Lambright nn Chairman and President, Export-Import Bank of the United States

Although Russia has carried out promis-

Winter 2006-2007

On October 5, 2006, James H. Lambright, Chairman and President of the Export-Import Bank, briefed Council members on his perceptions of

Mr. Lambright noted that he is optimistic about Russia given that the debt to export ratio in the private and public sectors has decreased significantly.

Russia has large current account and fiscal surpluses due to high oil prices, yet the country has shown discipline in not spending large amounts of the energy revenues. Finally, clear progress has been made in market reforms, generating interest in investing in Russia.

ing reforms, two particular types of risk exist: country risk and commercial risk.

The development of the legal system has been hampered by inconsistency across regions, the arbitrary application and interpretation of laws and a lack of experienced or strong judges.

Other concerns involve rampant corruption, numerous and at times predatory regulation and expropriation. In another words, government intervention has increased company risk. From a commercial perspective, companies face a number of obstacles. Investing has proven to be complicated due to accounting and financial Continued on page 35...

Russia Business Watch

the investment environment in Russia, as well as the risks involved in doing business there.

31

legal update

New Russian Legislation: 2006 Year-End Update The following summary is not an exhaustive list of Russian legislation adopted in the second half of 2006, but rather a brief synopsis of the most prominent new laws impacting business activity in Russia. The first date represents when President Putin signed the legislation; the parenthetical date reflects when the law came into effect.

Administrative

Russia Business Watch

Winter 2006-2007

June 30, 2006 (October 5, 2006) — Federal Law No. 90-FZ “On Amending the Labor Code of the Russian Federation, Declaring Invalid Certain Laws and Regulations of the USSR and Abolishing Several Laws (Legislative Provisions) of the Russian Federation.” The law introduces a number of changes to the Labor Code of the Russian Federation, mostly of a legal and technical nature, aimed at removing existing controversies and inaccuracies of the Code and at eliminating ambiguities without changing the conceptual nature of the Code provisions. There are also many substantive amendments related, in particular, to labor books, unpaid leave, trade unions, employee compensation, and maternity leave, as well as to employee dismissal procedures and other issues.

32

July 18, 2006 (January 15, 2007) — Federal Law No. 110-FZ “On Amending the Federal Law ‘On Legal Status of Foreign Citizens in the Russian Federation’ and Abolishing Several Provisions of the Federal Law ‘On Amending Certain Laws of the Russian Federation.’” Amendments simplify the immigration procedures relevant to the temporary resident status granted to a foreign citizen that entered the territory of the Russian Federation on a visa-free basis, as well as the mechanism of employment of such foreigners in the Russian Federation.

The Russian government is now entitled to extend (up to 180 days) or reduce the 90-day term of a temporary stay in Russia for certain categories of foreigners. In cases when this term is

reduced, the government must notify the foreigner on when he or she is to leave the country. Amendments introduced by this law also allow obtaining a temporary residence permit in excess of the quotas for the foreigners entering Russia on a visa-free basis. Foreign citizens permanently or temporarily living in the Russian Federation are exempted from the duty of annual re-registering.

This law enables foreigners entering Russia on a visa-free basis to independently obtain work permits within 10 days from the day of filing an application with an appropriate state agency.

Employers may use such a foreign work force without obtaining a special permit.

July 18, 2006 (January 15, 2007) — Federal Law No. 109-FZ “On Migration Registration of Foreign Citizens and Stateless Persons in the Russian Federation.” The law improves the legal regulation of the migration process by forming a new administrative and legal mechanism for registering foreign citizens and stateless persons living in (or arriving to) the Russian Federation. The law establishes a simplified procedure for the registration of foreign citizens and stateless persons at the place of their residence or stay in the Russian Federation.

The law defines the rights and obligations of foreigners in the process of the immigration registration, the grounds for removal from immigration registration, and information recorded in the process of immigration registration. It also specifies the grounds and procedure for registering foreigners in the place of their residence and contains the list of documents required to be submitted for registration.

November 5, 2006 (November 9, 2006; some sections – January 15, 2007) — Federal Law No. 189-FZ “On Amending the Administrative Code of the Russian Federation (by Strengthening Liability for Violation of a Procedure for Employing

Foreign Citizens and Stateless Persons in the Russian Federation).” This law amends the Administrative Code of the Russian Federation by strengthening liability for the violation of a procedure established by the legislation for employing foreign workers in Russia. In particular, emphasis is placed on the possibility of making an employer liable for violation of employment procedures for each foreign employee.

Advertising October 16, 2006 (October 29, 2006 with some exceptions) — Federal Law No. 160-FZ “On Amending the Laws of the Russian Federation and Abolishing Certain Provisions of the Laws of the Russian Federation Due to Adoption of the Federal Law ‘On Advertising.’” Several laws of the Russian Federation are amended by this law to reflect regulatory changes resulting from the enactment of the Federal Law “On Advertising.” In particular, the law introduces a new wording of Article 9, Section 2 of Federal Law No. 2300-I of February 7, 1992 “On Protecting Consumers’ Rights,” which stipulates that producers (sellers) engaged in activities subject to licensing or state accreditation are required to inform their consumers of the type of activity, license number and/or accreditation certificate number, license and/or certificate term and which agency issued such license and/or certificate.

Aviation October 25, 2006 (July 31, 2006) — Federal Law No. 168-FZ “On Amending Article 12 of the Federal Law ‘On State Regulation of Aviation Development.’” A new wording of Article 12 (dealing with the participation of foreign capital in aviation organizations) is introduced by the law. It allows foreign participation in aviation organizations provided that a foreign share shall not exceed 25 percent of

July 27, 2006 (August 9, 2006; Article 1, Section 26, item d – July 1, 2007) — Federal Law No. 146-FZ “On Amending the Federal Law ‘On Joint Stock Companies.’” The law introduces a number of important amendments to the Federal Law “On Joint Stock Companies,” mostly related to the issues arising during mergers and acquisitions of companies in the Russian Federation, including voting procedures at the general meeting of shareholders, the election procedures of the company’s governing and controlling bodies, amending company charters, essential terms of the merger and acquisition agreements, the procedure for buying out the shares of shareholders who request it due to the company reorganization, etc.

Currency Regulation

July 27, 2006 (August 29, 2006) — Federal Law No. 145-FZ “On Amending Article 3 of the Federal Law ‘On a Customs Tariff.’” The law establishes a procedure

July 26, 2006 (August 7, 2006) — Federal Law No. 130-FZ “On Amending Article 3 of the Federal Law ‘On Financial Leasing.’” Amendments permit the leasing of military products for the purposes of military and technical cooperation with foreign states. This measure will facilitate military and technical cooperation with countries having limited financial resources and is also regarded as a foreign policy instrument.

July 27, 2006 (August 9, 2006) — Federal Law No. 140-FZ “On Amending the Federal Law ‘On Banks and Banking Activity’ and Article 37 of the Federal Law ‘On Consumer Rights Protection.’” The law “On Banks and Banking Activity” is amended by Article 13.1 governing the performance of certain banking activities by commercial organizations that do not have the legal status of a credit agency. The Article establishes, inter alia, a list of terms to be satisfied by such an organization to perform banking operations required to facilitate cash payments by individuals for electricity, utilities and premises without obtaining a license from the Bank of Russia.

The law also amends Article 37 of the Federal Law “On Consumer Rights Protection” by clarifying the individual cash payment procedure.

July 27, 2006 (August 9, 2006) — Federal Law No. 141-FZ “On Amending

Information Technology July 27, 2006 (August 9, 2006) — Federal Law No. 149-FZ “On Information, Information Technology and Protection of Information.” The law regulates the relationships arising from exercising the right to search, obtain, transmit, produce, and disseminate information, and the application of information technologies and information protection. It defines the term “information,” describes the legal capacity of the owner of information, the right of access to information, guarantees a procedure for exercising such right, the various forms of using up-to-date information technologies like information systems and information telecommunication networks, and also sets out basic state policy guidelines in the field of information technology application.

The law will not extend to the legal protection of intellectual property and equal individualization tools.

Intellectual Property July 3, 2006 (July 18, 2006) — Federal Law No. 98-FZ “On Amending Article 151 of the Criminal Procedure Code of the Russian Federation.” The amended Article 151 of the Code provides that in cases of violation of the copyright and adjacent rights provided in Article 146 of the Criminal Code of the Russian Federation, the preliminary investigation may be initiated by investigators not only of the prosecutor’s office, but also

Winter 2006-2007

Customs

Financial Services

the Federal Law ‘On Mortgage Securities.’”

The amendments revise, in particular, the definition of “mortgage coverage,” requirements for mortgage coverage, and asset exclusion from mortgage coverage. They also allow two or more bond issues to be covered with one mortgage coverage. The amendments also clarify the cases when the owners of bonds have a right to demand the issuer to redeem bonds with mortgage coverage pre-term.

Russia Business Watch

July 26, 2006 (July 27, 2006) — Federal Law No. 131-FZ “On Amending the Federal Law ‘On Currency Regulation and Currency Control.’” The purpose of the amendments is to achieve free convertibility of the Russian national currency.

As of July 1, 2006, the law abolished provisions requiring business entities to make reserves and use special accounts for money transactions. However, certain provisions of the amended law became effective only on January 1, 2007 due to the complexity of their expedited implementation.

for determining export customs duties for crude oil and certain petroleum products to be listed by the Russian government. Special formulas provided by the government will be used for calculating these duties. Governmental decisions modifying the duty rates must be published in an official publication of the Russian Federation at least 10 days prior to such changes become effective (before enactment of this law such changes in rates of export customs duties came into force upon expiration of a one month term after their official publication.)

legal update

the charter capital of the aviation organization unless other participation is specifically authorized by the President of the Russian Federation. This Article also leaves managerial positions in aviation organizations for Russian citizens only unless otherwise decided by the President of the Russia Federation.

Corporations

33

legal update

of the Ministry of Internal Affairs (alternative jurisdiction).

December 18, 2006 (January 1, 2007) — Federal Law No. 230-FZ “Civil Code of the Russian Federation, Part 4.” Part 4 of the Civil Code of the Russian Federation is a complete codification of legal norms governing intellectual property in the Russian Federation. It compiles, in particular, various legal norms on copyright and adjacent rights, trademarks, legal protection of computer programs, and exclusive rights.

Russia Business Watch

Winter 2006-2007

Besides regulating traditional areas of Russian intellectual property law, Part 4 also introduces new legal institutions in this sphere. In particular, the legislation includes the protection of the exclusive rights of the maker of a database for the content of such a database. Also for the first time, the law envisages protection of the exclusive adjacent rights of a publisher of a work of literature, science or art that was not published within the copyright period and, as a result, was transferred to the public domain or that was never covered by the copyright. Part 4 also regulates in detail issues related to corporate names and commercial brands.

34

A number of the norms of Part 4 of the Civil Code are dedicated to the protection of copyrights. Great attention is paid to the regulation of two main contracts documenting the transfers of intellectual property rights: a contract on transfer of exclusive rights and a license contract.

More strict measures are provided for “intellectual piracy” (e.g., confiscation and destruction of equipment and materials used by violators and enforced liquidation of business entities and individual entrepreneurs).

Natural Resources June 3, 2006 (January 1, 2007) — Federal Law No. 74-FZ “Water Code of the Russian Federation.” The new Water

Code contains a number of important novelties, including, inter alia, provisions (i) limiting the ability to privately own bodies of water; (ii) explicitly defining the legal framework and parameters of water protection zones; and (iii) substantially regulating the management and protection of bodies of water.

July 18, 2006 (July 31, 2006) — Federal Law No. 117-FZ “On Gas Export.’”

The law applies to the gas extracted from all types of hydrocarbon fields as well as transported gas or liquefied gas, and provides the basic principles for state regulation of gas exports. The law does not apply to exported gas that was produced under production sharing agreements concluded before this law entered into force.

Any organization possessing a joint system of gas supplies to its whollyowned subsidiaries enjoys an exclusive gas export right.

October 25, 2006 (November 10, 2006) — Federal Law No. 173-FZ “On Amending Article 17.1 of the Federal Law ‘On Subsoil.’” The new wording of Article 17.1 of this law provides for new grounds for a subsoil right of use transfer and the reissuing of licenses in the case of a transfer of subsoil use rights from a parent company to its subsidiary and vice versa.

December 4, 2006 (December 8, 2006) — Federal Law No. 200-FZ “Forest Code.” The law introduces a revised wording of the Forest Code of the Russian Federation. The Code regulates issues of the use, protection, conservation, and reproduction of forests.

It establishes, in particular, a procedure for leasing parts of forests as well as for the purchase and sale of forest plantations, and regulates the transfer of parts of forests in permanent or temporary use.

personal data law July 27, 2006 (January 25, 2007)

— Federal Law No. 152-FZ “On Personal Data.” The law applies to the processing of personal data by federal, regional, municipal and other agencies, legal entities, and individuals using or not using computer hardware. The law is aimed at protecting human rights and liberties, including the right to privacy and private and family secrecy. The law also defines the rights and duties of the state agency empowered to act in this area.

Section 12 of the law covers the principles guiding cross-border transfers of personal data. Provisions of this section are brought in compliance with international legal acts covering personal data protection during transfers of such data to other countries.

Special Economic Zones June 3, 2006 (July 8, 2006) — Federal Law No. 76-FZ “On Amending the Federal Law ‘On Special Economic Zones in the Russian Federation.’” The amendments establish a procedure for creating and liquidating special economic zones in tourist recreation areas. They determine the legal status of the residents of special economic zones in tourist and recreation areas and define essential terms and conditions of the agreement to be concluded between residents of the area and the local administration. The law also amends provisions regulating (i) industrial and production zones and (ii) technological and innovation zones. It stipulates authorities of the local administrations of special economic zones.

June 3, 2006 (January 1, 2007 with some exceptions) — Federal Law No. 75-FZ “On Amending Part 2 of the Tax Code of the Russian Federation and Article 1 of the Federal Law ‘On Foreign Investments in the Russian Federation.’” The amendments enable permanent entities of the Russian Federation residing in special economic zones to reduce the profit tax rate payable to regional budgets from 17.5 percent to 13.5 percent for income derived from activities performed within the territory of a special economic zone.

Taxation July 27, 2006 (January 1, 2007) — Federal Law No. 151-FZ “On Amending Chapter 26 of Part 2 of the Tax Code of the Russian Federation and Abolishing Certain Provisions of the Laws of the Russian Federation.” The law establishes a procedure specifying which tax base will be determined in mining dehydrated, desalinated and stabilized oil.

July 27, 2006 (January 1, 2007 with some exceptions) — Federal Law No. 137-FZ “On Amending Parts 1 and 2 of the Tax Code of the Russian Federation and Several Laws of the Russian Federation Due to Taking Measures on Tax Administration Improvement.” Amendments were made to Part 1 of the Tax Code in order to improve tax control, organize tax audits and the tax documents flow and encourage taxpayers to pay taxes and duties, as well as strengthen the guarantees of observance of taxpayers’ rights and legitimate interests.

Unfair Competition and Consumer Protection July 26, 2006 (October 26, 2007) — Federal Law No. 135-FZ “On Protecting Competition.” The law establishes the organizational and legal framework for protecting competition, including by prevention of monopolistic activities and unfair competition by Russian and foreign legal entities, state agencies and individuals. It also establishes uniform standards for protecting fair competition in commodity and financial markets.

This law amends and expands some definitions to reflect the established practice of anti-trust legislation implementation (e.g., it provides new definitions of competition and unfair competition and defines an unduly high price and an unduly low price of a financial service, etc.). The law defines monopolistic activities and introduces criteria allowing the antimonopoly agency to recognize as admissible certain types of monopolistic activities restricting competition.

Article 27 of the law lists cases when the setting up or reorganization of business entities requires approval by the antimonopoly agency. An antimonop-

oly agency’s approval is also needed for certain transactions involving shares or business property.

In specified cases the law can be applied extraterritorially.

November 25, 2006 (November 29, 2006) — Federal Law No. 193-FZ “On Amending the Law of the Russian Federation ‘On Consumer Rights Protection.’” The law establishes a legal framework to ensure the efficient and timely regulation by the government of the Russian Federation of consumer market relations to protect the rights and legal interests of trading entities, support domestic producers by giving them free access to the market, protect consumer rights, ensure food products safety, and satisfy the demand of Russian residents in quality commodities, works and services. The government of the Russian Federation regulates relations in the sphere of the organization and sale of commodities (performing works and/or rendering services) to consumers.

Sources: White & Case legislative updates, Interfax Russia & CIS Business Weekly, daily monitoring of legislation by FEMIDA-Audit LLC and www.duma.ru. n

Continued from page 31...

The Export-Import Bank remains confident that these risks will eventually improve as a result of market forces.

Russia is in need of massive investment, and in order to attract it, needs greater transparency. Thus, Russia has to remedy the corporate governance issues.

Market forces will also put pressure on the government to change. Russia has experienced a trend of rapid expansion in the private sector and has a booming retail market. An increase in consumerism will help to create a middle class and the desire for more economic freedom and investment. Again, to achieve that goal, the country needs greater transparency and better governing principles. n

Winter 2006-2007

Mr. Lambright explained that these two risks are connected. If the government continues to meddle, apply laws arbitrarily or try to intervene in other ways

on behalf of certain companies, businesses are less likely to pursue transparent corporate governance practices or to disclose the owner’s identity.

Russia Business Watch

USRBC Briefing with James H. Lambright practices that do not meet international standards. There are numerous instances where the owner of a company cannot be clearly identified. Therefore, the overarching concern with the Russian commercial sector is corporate governance.

legal update

Residents of tourist and recreational special economic zones are entitled to apply the increased coefficient (not exceeding two) for fixed assets’ depreciation rate and to carry-forward losses without limitation for the period of 10 years following the tax period in which losses were incurred.

35

new members Winter 2006-2007 Russia Business Watch

36

new member profiles

Edelman is the world’s largest independent public relations firm, with 2,600 employees in 46 offices worldwide. The firm was named PRWeek’s “Large Agency of the Year for 2006”.

Advertising Age named Edelman as one of 10 marketing firms to watch in 2007 in its “Best Agencies” issue.

The company was also named “2006 Large Agency of the Year” and “2005 International Agency of the Year” by The Holmes Group.

Moorgate Capital Management, formed by the TRUST Banking Group, is a private equity asset manager targeting investment opportunities in Russia’s population centers and regions.

The first fund, the Russian Strategic Growth Fund, will be listed on the London Stock Exchange’s Alternative Investment Market in April 2007 with a closing of about $300 million. This fund focuses on investing in industries that will support Russia’s economic growth in the future, such as healthcare, construction materials, specialty retail, three star hotel chains, niche advertising and media, logistics, and information technology.

One of the key advantages enjoyed

by Moorgate Capital Management is the support provided by the TRUST Banking Group. The group is a seed investor with a commitment to invest up to 15 percent of the total funds raised, subject to a minimum commitment of $20 million, as well as providing bridge and leverage financing to the fund on a case-by-case basis.

Moorgate’s management team has extensive private equity and Russiabased experience, and has participated in deals with a total value exceeding $1.3 billion in over 15 countries. The team’s track record includes high return private equity transactions as well as transactions with top Russian industrial groups.

offers clients strategic advice, communications planning, market entry/expansion strategies, government and public affairs, corporate communications, crisis communications, and opinion research.

T. Thomson & Associates provides clients with a comprehensive approach to their challenges and opportunities by utilizing the skills of its strategic partners in law, finance and banking, strategic communications, research, advertising and graphic design, and accounting and auditing.

Rusdolgnadzor is a full-service Russian collection agency. Focusing on debt collection and restructuring throughout Russia, the company draws on the experience of its principals and staff of seasoned high-ranking law enforcement officers, debt collection professionals and litigators. The services provided by Rusdolgnadzor to leading banks, insurance companies, leasing companies, and telecoms active in Russia include the collection of non-performing loans and other debts, verification services and advice to help increase the efficiency of in-house debt collection departments.

The White Nights Foundation of America (WNFA) was formed in 1999 to support the American activities of the Mariinsky Theatre’s Kirov Opera and Orchestra, its Academy for Young Singers and the Young Musicians’ Orchestra. The Foundation’s mission includes a commitment to be a positive and apolitical force to enhance understanding and to expand the educational, cultural and business relationships between Russia and the United States.

T. Thomson & Associates is an international strategic communications and business consultancy. The firm’s founder and President, Tom Thomson, has advised U.S. and Russian companies, governments and NGOs since the early 1990s on a range of policy and business issues, including energy, intellectual property rights, customs, investment, market entry, banking, transportation, aerospace, and others. The firm

WNFA is uniquely positioned to achieve these goals through the leadership of its international Board of Directors and Advisors, utilizing all of the artistic resources of the Mariinsky Theatre led by its General and Artistic Director Valery Gergiev. In supporting the Mariinsky Theatre and its “Kirov” ensembles, WNFA supports international music and art of the highest standard. These ensembles appear annually in the United States, and make regular touring appearances in 45 other countries. n

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