Medvedev Offers Promise of Change

ST. PETERSBURG — President Dmitry Medvedev raced between panels and podiums this weekend to make the case that change in Russia is afoot, promising to reduce taxes and barriers to foreign capital to attract an urgently needed “investment boom.”

“We have changed — first of all because the whole world has changed,” Medvedev said in his keynote address Friday to a packed hall of Russian and foreign investors at the St. Petersburg International Economic Forum.

The message, which Medvedev repeated in a second speech Saturday, echoed recent Kremlin signals that it was adopting a friendlier foreign policy. Medvedev kicked off the theme earlier this year when he said Russia should display a smiling face instead of gnashing teeth that frighten others.

Medvedev on Friday announced a lower capital gains tax on long-term direct investment starting in 2011 and a huge reduction in the number of strategic companies with restrictions on foreign investment.

Plans to exempt investors from long-term capital gains taxes were first presented by the Finance Ministry in March in hopes of stimulating private equity and venture capital investment. But reports at the time said this would only apply to shares of companies not traded on exchanges.

Strategic industries like energy, aerospace, defense and media have been limited for foreign investment since a 2008 law that requires foreign companies wishing to invest to seek special permission from a commission chaired by Prime Minister Vladimir Putin.

Medvedev said he had signed a law on Friday morning that reduced the number of strategic enterprises from 208 to 41.

The new law will also reduce the number of so-called federal unitary enterprises from 230 to 159, he said.

Known by their acronym as FGUPs, these enterprises have been criticized as stifling competition and inviting wasteful government spending. Last year, the Federal Anti-Monopoly Service proposed eliminating all those that aren’t involved in strategic sectors.

Medvedev said that if conditions remained favorable, corporate taxes would be further reduced in the coming years. He said he had ordered the government to set up a new investment fund focusing on modernization where every ruble in state cash would be supplemented by 3 rubles from the private sector.

The president acknowledged that economic reforms could not be achieved by orders from above. Instead, he said, the government should focus on creating favorable overall conditions. “The state should not tear apples from the tree of economics. What it should do is help to grow our apple orchard, to develop our economic environment,” he said.

Forum participants reacted positively to the speech.

“His commitment to reforms … was very well received, not only among foreign but also among Russian business leaders,” Klaus Schwab, executive chairman of the World Economic Forum, told The Moscow Times.

Dominique Cerutti, deputy CEO of NYSE Euronext, said that while the task ahead was formidable, he believed the country’s leaders were up to it. “The leaders in Russia are just incredible. The more I meet with them … the more I’m impressed,” he said in an interview.

Former World Bank president James Wolfensohn said that while Medvedev was openly addressing the right problems, the country now needed new approaches to solve its overly heavy dependence on natural resources.

Above all, he said in an interview, the government should pay more attention to changing the education system. “If you don’t do that, then your ability to confront the technological challenges becomes much less,” said Wolfensohn, who now works as a consultant.

Medvedev announced a state-sponsored exchange program to send more Russian students to the world’s leading research institutions. He also reiterated plans to make Moscow a global financial center and to make the ruble a global reserve currency.

French President Nicolas Sarkozy, who visited the forum on Saturday, called for closer cooperation with Europe. “The idea that Russia must protect itself from Europe and that Europe must protect itself from Russia is [an idea] of the past,” he said in a speech.

Other participants were more critical. In opening remarks Thursday, Swedish Foreign Minister Carl Bildt pointed to the country’s dismal performance in the latest Global Competitiveness Report, were Russia dropped 12 spots to No. 63 out of 137 this year, and in Transparency International’s corruption index, where it is firmly rooted near the bottom. “There are quite substantial problems that need to be addressed in Russia,” Bildt said.

Medvedev said nothing about who would govern the country after his presidential term ends in 2012. He did not mention his mentor, Prime Minister Vladimir Putin, with whom he has shared a tandem of power since 2008.

Putin, who stole headlines during last year’s forum when he berated factory owners in the nearby town of Pikalyovo for not paying wages, kept a markedly low profile this year, visiting factories in the Yaroslavl region on Friday and hosting talks with Croatian Prime Minister Jadranka Kosor on Saturday.

On Friday, opposition leader Boris Nemtsov handed out copies of his pamphlet “Putin. Results” to passers-by in central St. Petersburg. Earlier in the week, city police confiscated some 200,000 copies of the pamphlet, which criticizes Vladimir Putin’s 10-year rule as president and prime minister. Nemtsov said on his blog that he managed to distribute 2,000 copies of the report.

Alexander Lebedev, the outspoken billionaire and media tycoon, said the political system should change, too. “Why do we keep fearing changes in the judicial system, elections, parties and parliament? Without a competitive playing field in politics, we won’t get very far,” he said on the sidelines of the forum, Kommersant reported.

Medvedev said in a second address Saturday that while economic changes would necessarily lead to political ones, the political changes should not change the system. “The economy cannot change while political structures remain absolutely stiff. But we will retain our values and adhere to our traditions and to the Russian Constitution,” he said.

Thomas Graham, an adviser to former U.S. President George W. Bush on Russia, said the pace of change had definitively picked up under Medvedev. “There is much more open debate, and [the government] is trying very hard to present a different Russia,” he told The Moscow Times.

Graham said the situation was “not ideal” with human rights and media freedom, but there was visible progress. As an example, he pointed to the Internet. “You can find a full range of opinions online,” he said.

Washington-based Freedom House ranked Russia 175 out of 196 countries in its annual report on global press freedom this spring, and Internet usage in the country stands at about 30 percent, far below Western levels, while an even smaller fraction of people use the Internet as a source for political information.

Medvedev said in his speech Friday that information technology was a key factor for democratization and that he hoped Internet usage would reach 90 percent over the next few years.

Many of the forum’s panels focused on the Kremlin’s determination to push high technology, most notably with the project to establish an “innovation city” at Skolkovo outside Moscow. The plans naturally pleased those businesses affected. “The atmosphere was very good,” Telenor CEO Jon Fredrik Baksaas said after attending a closed-door meeting between Medvedev and business leaders Friday.

Baksaas said connecting most of the population to the Internet by 2015 was realistic if 3G and 4G high-speed wireless networks were expanded.

Medvedev held several closed-door meetings with top executives of large international companies Friday.

Subhanu Saxena, a global executive committee member of Novartis Pharma, said he liked “the very open environment” of the meeting.

Some debates, however, descended into outright boredom, perhaps most notably at Friday’s plenary session. Wall Street Journal editor Robert Thomson, who moderated the panel, wasted the opportunity to confront Medvedev with a hard-hitting question by asking him vaguely whether deflation was better than inflation, whereupon the president replied with an equally vague “it depends.” Thomson had just conducted a wide-ranging interview with Medvedev, which was published Friday.

Forum frustration was also felt by journalists when they learned that for security reasons they were barred from attending events if Medvedev was in attendance or close by. In a bizarre twist, that also affected Saturday’s panel on the future of the media, meaning that while journalists were debating their own future, interested reporters were forced to watch via online transmission without a chance to ask questions.

At Friday’s gas market discussion, the forum’s “change” theme received a decidedly conservative treatment as panelists said new forms of energy and natural gas would not challenge Gazprom’s market share.

Deputy Prime Minister Igor Sechin offered a staunch defense of the export monopoly’s pipeline model, disparaging the chances of alternative energy and saying U.S. supplies of shale gas were unlikely to dent sales to Europe.

The panel’s moderator, Morgan Stanley chairman Rair Simonyan, jokingly suggested that Daniel Yergin, chairman of Cambridge Energy Research Associates, could shorten his remarks because Sechin’s report had repeatedly cited his research.

More than 50 deals worth in excess of 15 billion euros ($18.5 billion) were signed at the forum, Kremlin economic aide Arkady Dvorkovich told reporters Sunday, referring to investment agreements, mergers and acquisitions and sales contracts.

“Lumping these figures all together isn’t quite correct,” he said. “But if we try to calculate the overall volume of various agreements that were reached, then it’s in excess of 15 billion euros.”