LONDON, Oct 21 (TrustLaw) - Russia has made some progress in battling endemic corruption but needs to do far more to realise its full economic potential, leading investors said at a conference this week.
Defeating corruption is one of Russian President Dmitry Medvedev's key policies, but Western economists and strategists at a London investment forum on Russia and the Commonwealth of Independent States (CIS) all identified it as the biggest problem they face.
"Corruption is still a major hindrance to doing business in Russia, Ukraine and Kazakhstan," Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD), said in his opening speech at the Adam Smith Conference.
Those sentiments were echoed throughout the meeting by other economists and investors.
"Corruption and not instability is worrying investors in Russia," said Chris Wheafer, chief strategist at the Moscow-based Uralsib bank.
Russia was notoriously turbulent during the 1990s after the collapse of the Soviet Union, but since 2000, when Vladimir Putin became president, it has been relatively stable. Western investors piled into the country and the economy grew by about 7 percent a year until 2009 when the global economic slowdown and a collapse in oil prices pushed it into a recession.
Russia pulled itself out of the downturn by devaluing the rouble and spending billions from its national wealth fund. It avoided the feared social fragmentation, and maintained stability.
LONG HAUL
The country's notorious culture of corruption, though, has been harder to change.
"It's going to take years, maybe generations to solve this problem to satisfy investors," said Roland Nash, chief strategist at Moscow-based investment bank Renaissance Capital.
Endemic corruption seeps through all the former Soviet states, affecting most parts of life. But it is Russia with its population of 140 million and $1.3 trillion economy - the 12th largest in the world - which attracts the most attention.
Anti-graft watchdog Transparency International ranked Russia in 146th position out of 180 countries in its 2009 Corruption Perceptions Index, alongside its neighbour Ukraine, Zimbabwe, Ecuador, Sierra Leone, Kenya and Timor-Leste. Russia, the world's second largest oil exporter, is the biggest economy in the bottom half of the index.
Many investors at the investment conference blamed Russia's large army of bureaucrats for preventing change.
"This has been Russia's problem for 300 years," said Liam Halligan, chief economist at Prosperity Capital Management which has assets of around $4.2 billion invested in Russia. "You're asking bureaucracy to uncover and resolve corruption from within itself and that's very difficult."
The World Economic Forum's Global Competiveness Index 2010-2011 ranked Russia 63rd out of 139 countries. But the survey revealed that people doing business in Russia overwhelmingly regard corruption as the biggest problem.
And Russia scored poorly on other indicators related to corruption and transparency. It was ranked 128 for three - the protection of property rights, burden of government regulation and reliability of the police - and 132 for protection of minority shareholders' interests.
POLITICAL PROMISES
Medvedev has often said he wants to root out corruption, and with a parliamentary election in Russia next year and a presidential election in 2012, investors are expecting him to deliver on his promises.
Last month Medvedev sacked Yuri Luzhkov as mayor of Moscow, a position he had held since 1992. Luzhkov had publically clashed with Medvedev, but there are also allegations he used his position to benefit his wife who is a Moscow property developer and one of the richest women in the world. He has always denied this.
The Russian people have also become more aware of corruption, which constantly crops up in opinion polls as one of their main concerns. Some investors at the conference argued that Russia is labouring under an image problem and that corruption affects all developing economies.
But there is still a long way to go.
Sergei Grichishkin, managing director of Alcantara Asset Management which focuses on fixed income investments in Russia and the CIS, said he avoids buying equity stakes in Russian companies because their affairs are often so opaque and minority shareholder rights have little protection.
"If somebody wants to buy into Russia or Kazakhstan, then transparency is not something that you're buying into," he said.
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