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Russia: Regions Seek Business But Investors Keep Their Capital In Moscow

The positive changes in the Russian economy have improved the country's business climate, but for the most part, foreign and Russian firms are still opting to keep their capital invested in the Moscow region rather than branching out into the Russian provinces. RFE/RL Moscow correspondent Francesca Mereu reports on the reasons why the country's regions are still taking a back seat to Moscow in attracting investors.

Moscow, 31 October 2001 (RFE/RL) -- Russia's reforms and improving economic performance were the main topics of a two-day session of a conference organized in Moscow by the Swiss-based World Economic Forum which concluded yesterday. Russian and foreign economists alike left the conference expressing optimism about Russia's economic reforms.

Kremlin economic adviser Andrei Illarionov was among the Russian officials on hand to tout the country's improving economic performance. He credits Russia's more robust economy with making the country more attractive to international investors than it has been for years.

"Today, Russia is fundamentally different from what we had 10 years ago. Macro-economic fundamental structures are much stronger and much healthier than they were at any time during the last 10 years," he said.

The overall improvement of the economy has attracted a return of foreign investments to the country. But now, as before, investors prefer to put their capital in businesses in Moscow and the surrounding region rather than venturing to the provinces beyond.

Sergei Kirienko, the presidential envoy to the Volga Federal District, pointed out that over the past few years the regional economic situation has improved. But, he says, the gulf between Moscow and other regions is still too wide. He cites differences in federal and regional business laws as one of the reasons for the gap. In his own Volga district, for example, a number of regional laws stand in direct contradiction to federal guidelines.

"In the Volga federal region alone there were more than 2,000 laws that contradicted the federal law, and very often they concerned areas of business activities. Because of this situation, big investors who registered their business in one region could not sell their production in another region. Now the first task is to eliminate legal and economic barriers of this kind."

Kirienko says many problems have been resolved over the past few years but adds that much work remains.

Boris Nemtsov, a member of the State Duma and head of the liberal Union of Right Forces political party, said the main problem in the Russian regions is the lack of democratic structures. He said that investments usually go where democratic standards have been established: "More than a half of foreign and Russian capital [that is invested] is invested in Moscow, the Moscow region, St. Petersburg, and Ekaterinburg. According to a study by the Institute of Transition Economics, investments go where you have more freedom -- where you have press freedom, democratic government, and civil society. In short, there is a strict link between the investments that were made in the regions and the democratic values and freedoms protected in the regions."

Nemtsov says many governors throughout Russia's 89 regions act more like despots than democratic leaders, driving away many potential investors.

Clifford Kupchan, vice president of the Eurasia Foundation -- a private organization that supports democratic and free-market systems -- pointed out that investment goes where it feels safe and where there are safe institutions -- guarantees that the Russian regions have so far been unable to provide. Kupchan says some interest groups in the regions have no desire to see a change in the present situation.

"Political leadership and political will in the regions still matters. Even though governors play more than an economic role, getting the politics right matters in attracting investments. By getting the politics right we mean predictability, a budget, and we mean implementing the rule of law. Another thing I'd like to add is that the location is extremely important. Being in Moscow gets you things done more quickly. The problem in my view is that there are still interest groups that benefit from the old system."

Investment programs working in the region now favor investing modest sums in a large number of small enterprises. In 1997, the European Bank for Reconstruction and Development founded the Russian Small Business Fund (RSBF) in Vladivostok to provide loans of up to $125,000.

But according to Augusto Lopez, the executive director of the U.K. branch of Lehman Brothers bank, it is Russia that has to supply a good banking system capable of providing small loans to small and medium-sized businesses: "It is so unusual that in Russia it is actually the EBRD's micro-credit program which is fulfilling -- at least for very, very small entrepreneurs -- the role that a banking system should be playing today, which is providing credits to small and medium enterprises. In most transition countries the banking system is doing it quite efficiently. What's important, I think, is that Russians should gradually reconcile themselves to the idea that perhaps over the long term a good share of the Russian banking system is going to be owned by foreigners."

Kupchan of the Eurasia Foundation said that working out an effective regional strategy will mark a major step forward for the Russian economy.