| The Volga: the region accounts for one quarter of Russian GDP | ||||||
It is over a year since president Vladimir Putin moved to bring unruly Russian regional governors to heel, but it is still unclear whether the system of federal districts he introduced will help or hinder foreign investors intrepid enough to venture into Russia.
The harmonization of laws between local and federal level is all but complete and the intention was that the main role of the appointees to the new system, dubbed the president’s representatives, would be to produce a Russia-wide seamless legal and tax space. It was hoped this would reinforce Moscow’s control and indirectly create a level playing field for business.
Commentators argue that, with the exception of the Volga federal district, plenipotentiaries have had little positive influence on attracting investments and may have made things worse.
“There is no evidence that it has improved the situation overall,” says Sergei Tsakunov, chief executive of the state investment agency. “There has been no basic impact of the creation of the super regions on investment flows.”
On the surface, laws and tax regulations in one region should look the same as in another: a clear improvement over the old patchwork of conflicting and restrictive systems that sprang up during the Yeltsin years, making regional investment such a minefield for foreigners.
Beyond the superficial level, little has changed. The judiciary, overworked and underpaid, still provides little protection against the caprice of individual governors, who remain a potentially formidable barrier to predictable business. The governor of Belgorod in the central district for example, smarting from federal reforms that cut into his local tax revenues, is forcing companies to sign agreements to pay as much in taxes to the local budget in 2001 as they did in 2000, according to the privately funded EastWest Institute in its recently published EWI Russian Regional Report. The report, which analyzes political developments, describes the agreements as a “clear violation of the intention of federal law”.
In other regions, legal discrepancy was never the issue. Saratov region had only a small number of conflicts with federal law. But, argues another recent EWI Russian Regional Report, legislative reform “has done nothing to change the autocratic style of leadership in the oblast and there is still plenty of room for abuse.”
Even if governors adhere to the harmonized laws, that won’t solve everything. Federal law remains full of anomalies and contradictions, and corruption in the courts is widespread.
The Leningrad oblast, for example, is one of Russia’s most progressive investment destinations. In recent years it has attracted millions of dollars from abroad and such companies as Ford and Philip Morris have set up locally. Even so, it fell foul of the harmonization process and was forced to axe ground-breaking tax incentives that were found incompatible with federal law.
The presidential representatives have no official interest in economic development or initiatives. Instead, their duties are limited to legislative reform and to vetting certain appointments to federal bodies in the regions, over which they have no subsequent authority. Their main source of power lies in their proximity to the president. It’s not surprising that their hands are tied when it comes to improving the investment climate. Despite this restricted remit, some seem determined to get their hands on a slice of the pie, and the potential for corruption is huge.
A proposed forced consolidation of the fragmented timber industry in the north west, which includes St Petersburg and the Leningrad oblast, with a healthy cut of the profits for local officials, was just one ill-conceived plan to muscle in on the business scene.
With tens of millions of dollars of state money to be poured into the region on infrastructure projects, ahead of St Petersburg’s 300th anniversary celebrations, the stakes will become even higher. The district’s administration is arguing that it, and not regional governors, should control the cash. According to a source close to the situation, the typical cut corruptly taken by those who handle state financial flows is anything up to 30%.
Others have used their position more directly to influence local elections and consolidate their authority. Konstantin Pulikovskii, presidential representative of the far eastern federal district, was recently rebuked by the electoral commission in the Primorye region. His deputy, Gennadii Apanasenko, flagrantly abused his power to force local TV to promote his favoured candidate for a forthcoming governorship elections and misleadingly suggested that he was backed personally by president Putin.
Not everywhere is doom and gloom, however. Sergei Kirienko, the representative to the Volga federal district, which accounts for 24% of Russia’s GDP, seems to have been most successful in using his position to improve the local investment climate. The region has attracted between $500 million and $1 billion from domestic and international investors in the past year.
Using his extensive political and business background, Kirienko has positioned himself as a deal broker to intervene and mediate directly between investors and the 15 local governors of the regions under his district. “By using these offices [of the presidential representatives] people can get our support in defending against bureaucrats,” he says.
“Kirienko is doing a good job,” says Xsenia Yudaiova, an analyst with CEFIR, an economic research company affiliated to the Stockholm School of Economics. “He is helping to create a common market in the district by removing inter-oblast trade barriers.”
Howard Wilson, financial director of Sabre Management, a UK hotel firm developing a nationwide chain of hotels, the first of which will be in the Volga region, also praises Kirienko. “He has given us tangible support rather than mere lip service to our project,” he says. “Kirienko has supported us in helping to communicate between Moscow and the regions on our behalf.”
The central federal district administration has also shown initiative in promoting economic development. Vladimir Kishenin, economic adviser to Georgii Poltavchenko, the presidential representative, points to a co-operation agreement that he co-signed at the G8 meeting in Genoa with the Confederation of Italian Municipal Companies as evidence that the administration is active in promoting the economy of the district.
“The harmonization of laws in our district gives tremendous transparency for investors,” says Kishenin. “We are out there looking for partners and for understanding.” With 8,000 companies and over e20 billion ($18.2 billion) turnover, the Italian confederation will visit in September to analyze investment schemes and pilot projects.
In another initiative, Igor Zubkov, chief of Poltavchenko’s administration, is co-ordinating a trip to Berlin together with the presidential representative and the 18 regional governors of the district to meet with businessmen and politicians to promote investment opportunities. If the Berliners can deal with one mega governor (as the president’s representatives have come to be known) instead of 18 different ones that would be a clear improvement.
This being Russia, it would not be a surprise if the new system of district administrations created as many problems as it solves. The potential is clearly there for the presidential representatives to improve Russia’s regional investment climate.
If not strictly kept in check however, Putin may find he has unleashed another hungry bureaucracy that will in turn need to be brought to heel.
