Saint Petersburg - Russia must wipe out corruption if it is
to reform its economy after next year's presidential election and faces years
of budget deficits if it fails to do so, bankers and businessmen said this
week.
The country's finance minister Alexei Kudrin told the
Reuters Russia Investment Summit that he expected a reform drive after the
March election and that state spending should be cut to avoid a sharp increase
in taxes.
While investors at the summit, including BlackRock
Incorporated - the world's largest asset manager - said they were optimistic
about the prospects for Russia’s economy after the election, others offered
words of caution.
Said Mikhail Alexeyev, head of the Russian arm of Italian
bank UniCredit: "We all know very well that budget funds are being spent
inefficiently.
"A huge amount of money will continue to be lost. I
think taxes will rise and the budget deficit will stay."
Corruption is widely seen by investors as the main stumbling
block to attempts by the world’s largest energy producer to attract foreign
direct investment into areas of its $1.5 trillion economy other than the
natural resource sector.
The lack of such investment threatens a further delay in
Russian efforts to reduce reliance on energy revenue, a dependence which makes
it vulnerable to oil price volatility.
The government says Russia needs oil prices to stay above
$115 a barrel next year to balance its budget, compared with a spot price of
$112 this week.
Corruption, which has dogged Russia for centuries and
affects all levels of business and society, is regularly cited as the main
reason equities in Russia trade at a big discount to emerging-market peers.
Few believe the government can cut spending even after the
presidential election, which follows a parliamentary election in December.
Speaking at the summit, co-owner of metals company Norilsk
Nickel, Vladimir Potanin, said: "The government will find it difficult to
cut spending regardless of how many votes the next president gets. Therefore,
the only way out (for the government) is to raise taxes.
"Business will stop investing and there will be capital
outflows."
Potanin, ranked by Forbes magazine as Russia's fourth
richest man with a fortune of $17.8bn, expressed dismay at government overuse
of oil revenue to support ailing industries.
"No one has spoken about (the fight against) corruption
for some time," he said, referring to one of the main points of President
Dmitry Medvedev's successful 2008 election campaign. Many political analysts
expect Vladimir Putin, Medvedev's mentor, to return to the Kremlin after four
years as prime minister. One option for Putin would be to switch positions with
Medvedev.
Some of the most bullish investment funds in Russia, such as
Prosperity Capital which has $5bn under management, also said corruption was an
important risk for development.
Said Prosperity's chief economist, Liam Halligan: "The
Russians want corruption to be addressed and are worried about inflation."
Some analysts put the size of the so-called grey economy in
Russia at about the size of the gross domestic product. The Kremlin’s top
economic adviser, Arkady Dvorkovich, told the summit it amounted to about 25%
of GDP.
"There could be a situation in which we might not be
about to move forward in the battle with corruption and I consider that the
risk that is more important than any other," Dvorkovich said.
Some officials have said a privatisation push under way in
Russia could help reduce corruption because the private sector was better
equipped to deal with it than sprawling state monopolies.
Alexeyev said the situation was more complicated. "Even
if the privatisation of state banks takes place, it will be only partial and
nothing will change - the state will continue appointing executives and we will
not expect changes in the way (the sector) is managed."
Potanin also said the state needed to give the private sector
more chance to benefit from the global shift in economic power away from the
West.