President of Russia Dmitry Medvedev: Colleagues,
We agreed to meet and discuss measures for and prospects of improving investment climate in Russia.
Creating comfortable investment environment is essentially the most important goal that we have yet to achieve, even though everybody here understands that investments are a crucial factor of innovative development, and one of the main variables for successfully modernising our economy. For us, this is a key challenge for the immediate future and for the upcoming years.
We have taken certain measures in this area which allowed us to maintain relative investment stability during the global financial crisis. Nonetheless, in comparison to the previous year, the overall volume of capital investments into the Russian economy has decreased by 17 percent – this is the real rate, adjusted for inflation. With the overall drop in the volume of direct foreign investments into the global economy last year, the influx of investments into Russia fell by 41 percent. Clearly, this is a saddening figure.
As a result, the share of direct foreign investments into our nation was 3.6 percent last year constituting a drop of about one percentage point against 2008 figure. If we compare it to the results of other BRIC countries, it is about average in terms of drops in direct investments – roughly speaking, things are slightly better in Brazil and slightly worse in China and India.
Still, while all of us saw a decrease in direct investments volume, the drop in Russia seems rather substantial. At the same time – and this is clear – we were able to avoid a panicked capital flight from our nation.
Thanks to our anti-crisis measures, as well as earlier decisions, we have been able to create the basic conditions for a favourable investment climate, and to ensure political and macroeconomic stability. Overall, our economy is open to investment – this is an undisputable fact.
Our national tax system is quite good and meets certain criteria of an innovative economy thus allowing for the investment activity development. I will not remind you of all its key factors, but low tax rates are certainly important. In particular, the corporate profit tax rate has been reduced to 20 percent while Russia’s personal income tax rate has been the lowest among developed economies and has not changed for the past eight years.
Furthermore, several years ago, we liberalised foreign exchange regulations, lifted restrictions on flow of capital, and reduced the number of activities requiring licenses.
The procedures for auditing small businesses (this is something we discussed extensively and made important decisions on) are now regulated more clearly, to say the least. We have not had any major breakthroughs in terms of improving procedures themselves, but it is evident we have improved the regulations.
We have established transparent rules for allowing foreigners to invest in strategic industries. This is something that was repeatedly requested of the Government of Russia by foreign investors.
Nonetheless, despite these positive shifts, investors’ assessments of our nation’s business climate is still quite poor and quite low. Furthermore, due to the recent developments, Russia’s standing in a rating of nations with favourable business environment has dropped by two further points, and we are now ranking 120th out of 183 countries – in other words, we are in the bottom third of the list.
It is imperative to overcome negative influences on our investment climate, such as our nation’s poor federal and local governance, ineffective law enforcement, corruption, economic crime, excessive administrative, technical, and information barriers, as well as high monopolisation.
Our challenge today is to effect substantial changes in each of the areas I have listed and all state and local bodies must apply consistent efforts on their respective level. I will soon convene a special meeting to discuss this issue.
We must all understand: every investment project that is blocked by bureaucracy is a loss in income and a lost opportunity to create new jobs.
A post-crisis recovery in the global economy offers favourable conditions for foreign investments growth resumption. Our economy will only be able to attract sufficient investments when the conditions for investing in Russia become better than in nations that stand as our direct competitors in attaining international capital. True, we cannot hope for some absolute improvement or offer competitive advantages once and for all, making Russia the number one choice for investments and making our nation a more attractive place. However, we are obligated to permanently improve such conditions.
Incidentally, I would like to note that our closest partners Belarus and Kazakhstan are ranked in 58th and 63rd place, respectively, in the rating of countries with favourable business environment, and, unlike Russia, they are moving up the list, which, too, is something to reflect on.
Our current goal is as follows: we must develop a set of measures to stimulate investment activity in the country. I will name several such measures, and I hope that in your speeches, you will expand on this list.
The first of these measures should be abolishing quotas on hiring highly qualified foreign specialists. Second, we must ensure timely reimbursement of VAT in major construction and export of non-primary products. Third, we must optimise mechanisms for administrating scientific research and development expenditures and we have already discussed this within the framework of the Commission for Modernisation [and Technological Development of Russia’s Economy]. Fourth, we must introduce simplified customs procedures for companies that manufacture mechanical, technical, and high-tech products. Clearly, this is only a preliminary set of measures.
I would also like to remind you that the tariff preferences we introduce in particular areas of investment apply to large companies as well.
In the past year, the Government has supported the development of large companies, specifically in the raw materials sector, as well as others. To subsidise these companies, we had to spend a significant amount of money from reserves that the government had accumulated before the crisis. These companies were therefore not only able to preserve their assets, but to acquire some new ones as well.
Thus, the government is entitled to expect that the companies which enjoyed government support will engage in investment projects and invest in modernisation of Russian economy, rather than simply continuing their earlier policies of increasing raw materials exports. For the moment, they are lying dormant, so to speak. I think that the government needs to monitor these kinds of processes accordingly.
It might also be appropriate to discuss the suggestions on attracting “long-term money” to the Russian economy – first and foremost, the private savings. This is a sophisticated issue – one that is significantly influenced by psychological factors – because it is related to trust in our economy and our policies. For the moment, this money plays a fairly small role, at least on the investment market. The reason for this is a lack of trust, as well as underdevelopment in our infrastructure and negative outlooks toward this idea on the part of the financial institutions themselves.
Finally, I would like to mention the excessive attention auditing agencies give to our most successful corporate tax-payers. No doubt, it is important to audit everyone, including those who pay lots of taxes. But it doesn’t look good when the number of inspections increases pro rata a company’s economic growth: the better the performance, the stricter the requirements and the greater the number of inspections. This is something for us to keep in mind.
That is why we have representatives from the law enforcement and auditing agencies who are participating in this meeting. I would like them to show professionalism and competency in helping to create a favourable investment climate in our nation.
This is our common challenge, regardless of everyone’s specific duties. This is the challenge for the ministers in charge of economy, for senior officials of auditing and law enforcement agencies, the Central Bank officers and for the Presidential Executive Office. We must all strive to achieve the goal.