Headlines

July 14, 2006

G-8 IN ST. PETERSBURG: CLOUDED VISION AT THE SUMMIT

International Herald Tribune
By Charles Ryan

MOSCOW It is worrying to see the extent to which misconceptions about Russia's role in the world over the past decade have been reinforced in the runup to the G-8 summit meeting in St. Petersburg.

Russia is a very different country today from when Vladimir Putin became president six years ago. Russia is a better place to invest and a better place to live, and it has the potential to be a better partner for the West.

To provide some context, Russia's GDP stood at $250 billion when Putin was elected president. Based on Russia's current macroeconomic performance, the GDP should exceed $1 trillion when he leaves office in 2008.

The Russian story is no longer about a handful of men who became billionaires on the back of the chaotic economic environment of the 1990s. Now, Russia's energy wealth is not just trickling down to the broader population; it is gushing down.

The consumer boom in Russia today is driven by double-digit increases in real wages. Despite a strengthening ruble and large-scale restructuring in the industrial sector, unemployment is falling.

This new confidence and the good fortune coming from the rise in commodity prices are leading Russia to seek greater economic integration into the global economy. Russia's 12-year slog toward World Trade Organization accession underscores the country's acceptance of globalization and desire to integrate.

Russia is willing to compromise in order to achieve this. However, Russia also knows that it is unique among G-8 members in its ability materially to affect global energy security, and so it is determined to ensure that it significantly increases its influence as part of the bargain.

Are we in the West prepared for the increased leverage this integration will give the Russians?

This question is at the core of the current debate over global energy security. Very few countries in the world possessing oil and gas reserves permit private ownership of these resources. The only countries where fully private corporations control strategic natural resources are the United States, Britain, Canada, Australia, South Africa and - yes, Russia.

The Russian authorities know they don't have a judicial system that meets Western standards. They also know they have a severe problem with the selective enforcement of taxes. In looking for answers, Russia is looking to the West.

That is why it is so important that the West have a clear understanding of Russia's thinking, motives and ambitions. Yet misunderstanding of recent moves in Russia's energy sector has further fuelled mistrust.

A good example was the recent increase of the Russian government's stake in Gazprom to 51 percent. This did not alter the level of state control over the company, and actually righted a wrong from the flawed privatization of Gazprom. More importantly this change was followed by a complete liberalization of the Gazprom share market, increasing the share of foreign ownership and catapulting Russia to the No. 3 spot among emerging markets in the MSCI index, behind South Korea and Taiwan.

The decision to offer shares in Russia's other state- owned energy giant, Rosneft, has also been misunderstood. Rosneft controls one of the largest oil and gas resources of any company in the world. Its recently issued prospectus places it second among Russian oil and gas companies and fourth among global oil and gas producers. The decision to offer shares to the public should result in more transparent governance and make the company more sensitive to the concerns of investors, and eventually more independent of the Russian state.

In a first for the Russian stock market, shares are being offered to the Russian population - a liberal act on the part of the company's current owner, the Russian Federation. How many countries with this kind of asset choose to share ownership with Western institutional investors, strategic investors and its own population? Not many.

Just as investors are being offered a chance to participate in Russia's energy wealth, the G-8 is being offered a chance to discuss with Russia how it can help to improve energy security in the world. The West should take Russia up on its offer.

If we treat the Russians how they want to be treated, they are more likely to act how we want them to act.

Charles Ryan, founder of the United Financial Group in Russia, is the chief executive officer of Deutsche Bank Russia.



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