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Putin's Russia at a crossroads amid business snubs

Russia's President Vladimir Putin attends a meeting on May 21, 2014.

Story highlights

  • The Ukraine crisis, dispute with the West could not have come at a worse time for Russia's economy, Chris Weafer writes
  • The country desperately needs a boost of inward investment, and SPIEF was meant to showcase the opportunities
  • Instead, executives are staying away from SPIEF and sanctions are keeping companies at bay
  • As such, SPIEF is a crossroads for Russia, as it looks to recover much-needed economic growth

The crisis in Ukraine and the political dispute with the U.S. and EU could not have come at a worse time for Russia's economy.

Economic growth had been sliding across most key sectors for more than twelve months, before the crisis escalated in late February as previous drivers of growth become exhausted.

The country clearly needs to boost both the volume of inward investment and the participation of international companies, with their expertise and technologies, if it is to pull out of the long slump into which it is now seriously in danger of heading.

The St Petersburg Economic Forum was supposed to be a showcase for Russia's invigorated approach to business and investment reforms. It was intended to mark the start of the next phase of investment led growth intended to boost average annual GDP expansion to at least 4% to the end of the decade.

Instead, because of the sanctions already imposed by the EU and its partners in the G7 -- but particularly because of the concerns over the risk of even tougher sanctions to come -- many of the international companies which Russia needs to come have decided to delay Russia entry or expansion. Many of their CEOs, originally slated to attend the forum, are staying at home.

Before the onset of the global economic crisis in 2009, Russia's economy grew by an average of over 7% for most of the previous decade. The tax revenue from exports helped sustain a consumer and services boom which expanded with double digit growth until the economy hit the buffers in 2009.

Even after 2009, the economy grew at a modest, but globally competitive, average 4%. Then last year, growth fell to 1.3% instead of the 3.5% expected.

By December president Putin publicly acknowledged the cause of the problem was Russia's exhaustion of existing markets like oil. The country needed to attract much more investment into infrastructure and new industries to create the next growth driver.

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The initial signs offered great encouragement as the country boosted inward investment to over $90 billion, the third highest total after the U.S. and China.

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Russia also moved up nearly twenty places in the World Bank's Ease of Doing Business rankings since 2012, and the president demanded even greater improvements ahead of the end of his current term in 2018.

Instead of celebrating the progress made in 2013 and setting out plans to pull the economy out of last year's decline, which has extended into this year's first quarter, the focus now is about damage limitation and planning remedial actions.

Even if the political disputes get no worse and crisis deescalation is seen to start in the summer, 2014 is probably a lost year in terms of investment and expansion.

Under that best-case scenario, the economy may still grow between 0.5% and 1% especially if the price of Urals crude stays above $105 per barrel. At that level in combination with the current ruble-dollar exchange rate, the federal budget will earn more oil tax revenue than forecast and allow the government to boost spending in social categories.

But even in that optimistic case, the delayed projects and investment plans are unlikely to be put back on track until the autumn or early 2015.

If there are more sanctions, especially in more vital economic categories, then the time frame for a resumption of investment will be stretched out much longer and the risk of low growth extending into stagnation will greatly increase.

So too will the country's oil revenue dependency and oil price vulnerability.

The best outcome for investors and businesses is that the government uses the crisis as a catalyst for even faster reforms in order to counter the negative effect of the crisis and sanctions.

The so-called Asian pivot will bring in more investment capital but to efficiently expand and diversify the economy requires western company expertise working under Public Private Partnerships and joint ventures with Russian partners.

The events of the past few months have blown away any illusion that Russia can create the required growth driver only using its own resources. The crisis also means that many Western investors will now demand faster reforms and a higher standard of business governance from Russia before they commit money and reputation.

The 2014 St Petersburg Forum marks a critical crossroads for Russia. A roadmap will not be enough this time. Investors will wait to see down which road the Kremlin actually drives.

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