Russia is an attractive market for capital but not the only option. There are other BRICS countries, or the emerging economies in the broader meaning of the word. Russia will have to compete for investment against other dynamically developing economies.

       Valdaiclub.com interview with Andrei Kortunov, President of the New Eurasia Foundation .

       Which factors attract foreign capital to Russia, and which are hindering this?

       Since capital is currently fleeing Russia, we should probably start with the factors that prevent the increase of foreign investment in the Russian economy. Russia is a paradoxical country in this respect. Judging by the main macroeconomic indices, it should be an attractive investment destination.

       Russia reports good figures for trade balance and inflation and has a small sovereign debt. Of course, there is the factor of high oil prices but still, Russia should objectively be one of the most attractive countries for investors.

       Unfortunately, we do not see this happening. Instead, capital is fleeing Russia, which is a paradox and we need to find an explanation. There are objective circumstances that are unlikely to change, at least in the near future. But there are also subjective factors: the country has entered the election period and the next few months will be rather tense. This is a political risk factor, which any investor must take into account, one way or another. Investors act cautiously ahead of elections, when there is a high degree of uncertainty, even in the United States.

       But there are some things that reduce Russia’s attractiveness to investment, and we must do something about this. Investors see such events as the Magnitsky case as a warning that investing in Russia is undesirable because of unacceptably high risks. Many Western companies think that this happens because the Russian government has not explained the situation clearly and has not gotten to the bottom of the case.

       Such cases are not only covered by the political media, but also influence the professional community, including the investors’ attitude.

       Furthermore, many foreign investors cannot understand our rules of the game. They often have to review their decisions because the rules are changed. This is an uncomfortable situation for business. Take the unified social tax, which is raised and then we are told there are plans to lower it. But it is unclear how it can be lowered. This worries investors who dislike uncertainty and, when they come across it, they usually flee to other markets.

       We should also remember that Russia is an attractive market for capital but not the only option. There are other BRICS countries, or the emerging economies in the broader meaning of the word. Russia will have to compete for investment against other dynamically developing economies. We should analyze their economic advantages to see what we could emulate.

       What can be done to ensure capital inflow into Russian innovation industries?

       Speaking about innovation industries, which, unfortunately, have not yet become the biggest attraction for the largest investors in Russia, I think we should convince the investors of the advantages of investing above all in Russia’s human potential. We certainly tell them that Russia is a country of educated people and fundamental science, but this truth is not yet apparent to most investors. There is also the question of how this human potential can be converted into business.

       Foreign business people are convinced that the Russian system is over-administered and lacks major tax motivation for developing innovation industries, that there are obstacles to international exchange of ideas and inventions, as well as unresolved copyright problems. But even when efforts are taken to resolve these problems investors are not informed about them. Therefore, they continue to think that it is better to invest in Russia’s energy, construction or retail businesses, if at all, but never in innovation industries because it will be hard work, a huge headache and the benefits are far from obvious.

       Which administrative barriers hinder business development in Russia? Can they be lifted?

       Apart from structural disproportions, which are certainly very big and potentially destructive for the Russian economy, the other key problem is oligarchic domination in the sense that the Russian economy is based on a small number of large and super-large companies and enterprises. Unless we create a favorable climate for small and midsize business, economic diversification, and especially the development of innovation sectors, will be an uphill job. The thing is that innovations are most often proposed by small businesses; big business only supports and boosts innovative models after small business generates them.

       I believe that the main prerequisite is creating an environment favorable for small business, which implies fighting corruption at all levels, further simplifying financial, administration and other regulatory procedures for small business, supporting small business associations, and stimulating companies that may be unable to start operation unassisted but are potentially very interesting. There is a package of measures which we have been discussing for at least ten years. Unfortunately, only a few of these measures have been implemented.

       Private Russian and foreign investment in fixed assets amounts to 19.5% of GDP but should grow to 25%, the prime minister said in his speech at the First Russian social business forum. Can we achieve this goal in the near future?

       The question is not so much if this goal can be achieved or not, but whether we can achieve it without government administration of business and without using the administrative resources that often become an argument for development, including in business.

       We can do this quickly if we force big business, which is connected to the government and depends on state contracts, to increase investment in fixed assets. But such an increase will be unstable, because business will most likely reduce investment as soon as it has a chance to do so.

       The task is not to achieve a certain target figure but to create a comprehensive system of measures for increasing the attractiveness of such investment. I’m afraid we will not achieve this goal in the near future, because there are certain traditions and a degree of skepticism regarding the advantages of large investments in fixed assets.

       Business in Russia often operates in a very narrow timeframe; in other words, there is no confidence that you will still have your business in three, five or ten years. It takes time for such confidence to grow. Business takes fright easily, and fear undermines interest in investing in fixed assets. Reviving such confidence and creating conditions in which business will voluntarily – and not because someone has ordered it to – increase investment in fixed assets is a very difficult job.

       I think it will take time, but we could start doing something now. We should at least take some symbolic measures to show that the authorities’ attitude to business is changing. For example, it is argued that those who are in prison for economic crimes should be amnestied. A broad amnesty would show that the government is reviewing its relations with business. There are also other important factors, such as the Magnitsky and Khodorkovsky cases, which influence the investment climate in Russia and with regard to which some symbolic measures could be taken.

       If the authorities showed willingness to change their attitude to business, and prove that this will be a lasting change and not a temporary measure for the duration of an election campaign, investment in fixed assets will start growing again.

       Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.