COMMENT: It's time for Russia govt to deliver on roadmap reform

By bne IntelliNews January 22, 2013

Maxim Oreshkin of VTB Capital -

Overall, we view Russia's macroeconomic framework as broadly good, and supportive for the investment-led model of economic growth (except the pension system story). The key problem today, in our view, is that on the microeconomic/institutional level not much has been achieved over these past years.

In 2012, after a lengthy discussion about the inability to preserve the demand-led, post-crisis recovery growth model (which was in place in most of the naughties and in 2010- 2011), President Vladimir Putin explicitly announced a plan to transform the current growth model to an investment-based one.

He listed reference goals to increase the potential growth pace, which particularly include higher labour productivity, an increase in investment as a share of GDP, an advance in the high-tech and science-intensive industries, and additionally, the widely-promoted intention of making Russia one of the 20 leading economies from an investment climate perspective (ie. targeting 20th place in World Bank's "Doing Business" report).

All targets are interconnected and are to be taken into consideration simultaneously as budgetary, economic and monetary policies are planned and conducted. Particularly, the anticipated progress in the "Doing Business" report is closely tied to all other goals, as qualified efficient labour, cheap high-tech goods (without additional transportation costs) and the willingness of local companies to invest in the national economy are general favourites.

In February 2012, President Putin urged the business community forward to create detailed roadmaps for cheaper and easier entrepreneurial activities in Russia.

In this regard, the Agency for Strategic Initiatives (ASI), aimed at improving the business environment and proving a platform that gathers entrepreneurs and authorities, started preparing the package of roadmaps (22 projects in total) to enhance the investment climate. In particular, these roadmaps schedule measures to reduce amount, length and cost of administrative procedures. Besides, they are closely intertwined with the components of the "Doing Business" report and usually indicate a specific rank as a final measure of success.

At the moment, seven roadmaps are already effective (support of exports, customs administration, dealing with construction permits, registering property, getting electricity, and competitiveness & antimonopoly policy; as well as unified standard of investment prospects of regions). The rest of the roadmaps will be agreed before the middle of next year.

Implementation of the roadmaps is analysed on a regular basis, and most of are to be carried out by a set date - but not all. For example this year, the "Getting Electricity" roadmap implemented new regulations for retail electricity markets, which significantly reduced cost pressures on small business. Moreover, there are a number of agreements between institutions and companies that aim to fill up the lack of qualified engineers.

Meanwhile, as far as the "Dealing with Construction Permits" roadmap is concerned, experts confirmed only three realised measures out of the eight announced so far.

Particularly, a full list of required procedures to get construction permits was developed only for residential buildings. Additionally, one of the created laws assigns developers to cover infrastructure development, which might obviously lead to higher construction costs.

At the same time, despite a very weak rank in the 2013 report, the governance of customs services (under the customs administration roadmap) has remained almost unchanged, with progress noticed only in one out of the five steps planned. The Federal Customs Services has not shown notable moves (for example, although 95% of declarations are in electronic format, they have to be duplicated on paper).

Furthermore, early this year, the Federal Customs Services published draft amendments to the law, aiming for easier customs procedures for cargos. Among the proposed changes was more simple registration to be an authurised economic operator, and the abolition of the advance deposit requirement to become an authorised economic operator (currently they must hold EUR150,000 for industrial providers and EUR 1mn for non-industrial providers)).

The recent customs move is obviously positive for the business climate; however, to realise a higher place in the "Doing Business" sub-rating, the FST has to negotiate draft amendments with interested companies to properly fine-tune them. Besides, at seaports there is no athwart announced plans, unified electronic controls or communication procedures.

It is noteworthy that at the initial stage of the roadmaps' implementation (during this and the coming years), we expect that activities will largely consist of working out and passing the respective regulations and standards, thereby staying far away from quick wins. Also, pilot projects within the majority of effective roadmaps are to be conducted near term, following a path breaker initiative Unified standard of investment prospects of regions, which has already put into practice a range of pilot projects.

A programme "Unified standard of investment prospects of regions" implies 15 basic requirements for the business climate in a region, among which are investment strategy of the region, an online portal related to the issue, properly developed infrastructure, a special body to attract investments (facilitate "one window" approach for local/foreign investors), advanced training for officials, etc.

In the test mode, this programme has already been implemented in six of Russia's constituent entities: Tatarstan, Perm territory, Sverdlovsk region, Kaluga region, Lipetstk region and Ulyanovsk region. Currently 13 constituent entities are following the standard. The fully-fledged implementation standard furnishes a region with the necessary tool kit to put forward investment attractiveness, organise a platform for negotiations between regional authorities and business.

We see two main obstacles in achieving planned targets of moving Russia to a top-20 "Doing Business" rating. First is the implementation of the developed roadmaps: as we already saw, the tendency of the bureaucracy to soft-pedal changes will limit movement forward despite well-developed initial plans. Second, in the current global environment, almost every country is trying to improve its business climate and fierce competition for investments is a reality.

From February, it will be possible to monitor roadmap implementation online via a special website, according to the economy ministry. We believe that this will be the moment when it will be officially realised that, at the current pace, the goals that were set last year by President Putin will not be achieved. We believe that without a strong push from the president Russia might easily lose time and face a still-weak investment environment for longer. If this push proves a success, Russia will likely feel the positive impact on economic development as early as 2014, in our view. If not, Russia will be stuck at a potential growth rate of 2.5-3.0%.

In this sense, 2013 is becoming a pivotal year for Russia. To move forward, it needs to switch to an investment-led growth model, we believe. It is necessary to make a large step forward on the microeconomic/institutional level, including improvement of investment climate, lowering corruption levels, improving the quality of institutes (law enforcement, judicial systems, proper working labour market and much more). Really, it is time to deliver.

Maxim Oreshkin is chief economist at VTB Capital

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