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Russia: Chernomyrdin Predicts Surge In Foreign Investment

Moscow, 14 October 1997 (RFE/RL) - Russian Prime Minister Viktor Chernomyrdin has predicted foreign direct investment would surge to $7 billion next year, building on what he called encouraging signs of an economic recovery.

Chernomyrdin said Russia's investment climate has improved, but acknowledged that more work needs to be done to put economic reforms on a solid legal footing.

His comments yesterday followed the eighth session of the government's Foreign Investment Advisory Council, where senior western business leaders air their concerns.

Russia has lagged behind other post-communist countries in its ability to attract foreign investment. While foreign investment has poured into government bonds and the booming equity market, direct investments into real assets, such as Russian enterprises and production facilities, remains small.

According to a Council statement, total foreign investment in Russia as of July 1997 was $20.2 billion, less than half of which was direct investment. The United States, Switzerland, Holland, Great Britain and Germany top the list of countries with the greatest investments in Russia.

But there are signs that things are changing fast. Foreign investment in the first half of 1997 totaled $6.7 billion, three to four times more than during the same period last year. Of the total, $2.2 billion was direct investment, which is expected to double to $4 billion by the end of the year.

Chernomyrdin said the foreign funds would not flow without legislative reforms to improve the investment climate, with priority number one being the government's draft tax code.

As he put it: "We have to create the right conditions....Of course the most important document is the tax code, which we need as badly as air to breathe."

The Duma grudgingly passed the draft tax code in its first reading in June after intense lobbying by the Kremlin. A second reading is scheduled for November, but deputies have put forward more than 500 amendments to the code, raising fears that the bill will not be passed by the end of the year as the government had hoped.

Chernomyrdin tried to dismiss concerns about several recent events that have scared foreign investors, including the brief denial of a visa for U.S. investment banker Boris Jordan to re-enter Russia.

The prime minister also appeared out of the loop when asked about major U.S. oil company Exxon, which was deprived of the right to develop an oil field in the Far North despite having won the contract in an open tender. Minister without portfolio Yevgeny Yasin said the government's Committee on Investors' Rights would take up the issue.

Chernomyrdin said the government is now looking at ways to boost investment in the regions outside Moscow, some of which have trailed far behind the booming capital. He said only 12 to 15 of Russia's 89 regions were actively working with foreign investors, a number he said could be increased if the government pushes ahead with a legal framework for encouraging free economic zones.

A new law on free economic zones was passed by the Duma and then approved by Federation Council in July, but President Boris Yeltsin refused to sign it, citing his opposition to some of the tax breaks outlined in the bill. A commission composed of legislators is expected to amend the bill and send it back to Yeltsin for signing.

Chernomyrdin said foreign investors would be drawn to Russia by signs that the economy is on the road to recovery. He noted figures showing that Russia's gross domestic product increased 0.2 percent in the first nine months of the year while industrial production rose by 1.5 percent.

But foreign investors say the business climate in Russia remains difficult. As Percy Barnevik, chairman of the board at the Swedish-Swiss engineering group Asea Brown Boveri, put it: "You have to have the patience and endurance to stay in there so that you can turn a loss-maker into a profit-maker."