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Business Weighs Risks and Rewards of Russian Investment

As the St Petersburg International Economic Forum wrapped up over the weekend, the business leaders and investors who flew into Russia to see President Dmitry Medvedev outline his vision for attracting foreign investment into the resource-rich former super power were hopeful that reform is finally on the way, but sceptical that the Russian leadership will finally deliver on its promises to create a more business friendly environment.

Russian President Dmitry Medvedev
Getty Images
Russian President Dmitry Medvedev

President Medvedev used his key note speech to call for businesses from across the world come to Russia and invest in new facilities in a bid to create value added industries that would help Russia reduce its dependence on oil and gas revenues.

The CEO of Swiss drug giant Novartis was in town to break ground on a new purpose-built facility which has been made possible by President Medvedev's new inward investment program. Joe Jimenez told CNBC the deal made sense given the support he had received from the government and relatively high standard of education in Russia, which made finding the right kind of talent easier given the amount of Russian people holding a degree, many of them in sciences.

Two of the UK's biggest companies, BP and Shell , learnt the hard way that investing into the Russian market, whilst offering the chance of big returns, posed big risks when contracts turned out to be a process of negotiation, not a legally binding agreement as they had hoped.

Russia's economy is heavily dependent on oil and gas revenues, which have created an elite for which money is no object. The shops and restaurants were doing great business over the weekend as Russia's second city held the annual Red Sails ceremony, but the impact of high import taxes and a lack of locally produced goods make some of the most expensive prices in the world. Whilst the rich can afford a 10,000 pound ($16,100) bottle of cognac, the average man or woman on the street is more likely to be drinking cheap locally produced vodka into the early hours.

Stephen Schwarzmann, the CEO of the Blackstone Group , told CNBC that there is a big consumer society in Russia that could offer investment opportunities for the private equity giant, but believes in order for the country to become an attractive destination for foreign capital the top 20 politicians in Russia need to decide to take the battle against corruption very seriously.

Paying bribes to get the power turned on or get goods out of customs was widely discussed by a number of business leaders who flew in for the three-day meeting. Medvedev sounded serious when delivering his opening address, but there is still a long way to go before people will feel confident in the rule of law in Russia.

"Due to a general lack of trust, many of the recent accomplishments of government, business and civil society are still vulnerable. Institutions are not yet strong or independent enough, for example, to provide whistle-blowers with protection and provide companies subject to extortion with due process," said Matthew Murray from the Centre for Business Ethics and Corporate Governance.

A long-time Russia watcher who lives and works in Moscow laughed when discussing the anti-corruption campaign in Russia. "They are doing very well on the corruption, less so on the anti part," he said.

The big question for Russia and those buying into the president's vision for the future is whether he will even be in office next year should prime minister Vladimir Putin decide he wants his old position back. There is genuine uncertainty about what will happen in 2012, but one leading economist for a Wall Street bank told CNBC Medvedev will remain president and the external face of Russia whilst Putin will stay on as as prime minister with huge power of domestic politics. "They have spent so much time and political capital creating Medvedev's image that I cannot see them changing anything next year," he said.

It remains to be seen if this proves to the case. The same banker said that if Putin wants the top job back, "Medvedev will stop being seen on TV overnight".

Russia is no Western democracy, but with huge natural resources, expected growth of 5 percent this year and a president trying hard to attract money and talent to the country, expect more firms and investors to take a risk on Russia over the coming years.

Contact Europe: Economy

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