could see the country break free from the scottish national party believes. in the twenty four. leaders students take on the government against the. college fees they're taking legal action. to clear out those who do. but it's also calling for more competition to the

party's top position. discussions with. the government forces dispersed independence day. business. focus time for people all the money. oh and welcome to on the money with the business of russia is business i'm peter

lavelle onward to the st petersburg international economic forum captains of industry and business politicians and academics with me to discuss the russian investment story and there's lots to discuss expensive oil intensified capital flight and europe's woes. to discuss the agenda at the st petersburg form in two thousand and twelve i'm joined by peter weston he is chief equity strategist at aton he is also editor of the new book in from the cold to the rise of russian capitalism and simon phantom fletcher he is a portfolio manager with renaissance asset managers we also have david stern he's president of kraft foods and russia and ben heiress he is editor in chief of business new europe before we start our discussion gentlemen let's have a look at a snapshot of the russian economy before the st petersburg confound. this point predictions that nothing would change with legendary reelections this

spring of two thousand and twelve has turned out to be an extremely eventful period in both political and economics he is in russia to push ahead with the main economic go set for the country during his times as prime minister putin will deliver a speech as the new kremlin leader at the sixteenth international economic forum that kicks off in just a few weeks' time in st petersburg the government intends to use the forum to showcase the strength of the economy while foreign investors flock to the event to meet with both russian business leaders and then you cabinet putin. unveiled on may twenty first. it's even more attractive than it was last year new president you've got a lot of new governors new faces new opportunities new programs. put in worn the new cabinet that they would be working in a stormy global environment and said they should stick to the economic or said in previous years most troubling for the government is likely that prolonged and

substantial net capital outflow from the country which reached eighty four billion dollars in two thousand and eleven and has shown no signs of abating this year with capital flight topping thirty five billion dollars in just the first quarter and the ruble continued on downward slide against the american greenback moving below thirty one roubles to the dollar in the meantime russia is much better placed to weather the storm currently engulfing the debt ridden states officials forecast in their own budget deficit of just zero point three percent of g.d.p. this year but to major years and crisis will still severely hit russian exporters and limit the country's commodity exports we all have to care because what happens with greece will have a snowball effect it will cause more turmoil in currency markets and financial markets and bond markets and then we're all going to be affected it doesn't matter that greece is a small country with ten million people it's going to have many of facts and the rest of the world whether we like it or not i don't particularly like it but it's

a fact hours after taking office on may seventh for his thirty president putin signed a decree an economic policy aimed at addressing russia's shortcomings once and for all the prescriptions if implemented would go a long way to revolutionize the russian economy and society ordered the government to increase investments know this than twenty five percent of g.d.p. by two thousand and fifteen to boost labor productivity by one and a half times from two thousand and eleven levels and to. russia's position in the world bank's doing business index from hundred twenty eight in two thousand and eleven to twenty eight in two thousand and eighteen. this. realize. is out but the new president is no doubt expensive want so many of the levels the government wants to see any id in there on the money.

could start with you riches economy is still robust but it's slowing down what accounts for the diesel or ization of the growth here well i think that the major problem we're seeing is obviously in industry production where the numbers have disappointed as well as the fixed investment numbers that are coming down and the fixed investment numbers are really crucial to if you want to create a robust and facts strong foundation for quality of growth the other factor that we should not. forget is that russia's economy is still very dependent on the on big businesses small businesses although there are a lot of success stories if you look at micro small businesses only account for thirteen percent of g.d.p. fifteen percent of employment and i think there's been a there's been a miss by the recent leadership and it's a challenge for the new the ship to basically do small investor small and micro businesses and actually be that environment for those businesses actually deteriorated there was a peak in two thousand and four and five and since then also lot of form back then

as well to simplify this environment to small businesses that has completely not going away but it's deteriorating if you run a big business here and in russia how is this slowdown again that we still have growth i want to remind our viewers growth but it is slowing down here and how is it affecting your business from our perspective they've been changes post-crisis in consumer behavior you're certainly seeing a more discriminating consumer therefore competition for that consumer is accelerating. to be competitive you've got to be even more innovative you've got to be more differentiated i actually think that's good for the long term so some of the easy gains of the early parts of the last decade ago on now you got to work for your money but that's fine it's still by far the most attractive market in modern day europe in terms of growth and there's plenty of opportunity for upside ok then if i can go to you it's very interesting and we talked about this before on the program the easy days are over right and in the gains of the past they're harder to

retain as we move forward but russia has well is really in a very difficult international environment how how much do you attribute the slow down to just external shocks like oil prices of course the external position of their own is weighing on russia i mean the economy is booming consumer borrowing is going up retail is going up and what's holding it back is the appalling external environment and that creates a lot of uncertainty i mean peter mentioned capital investments and part of that is due to the fact that people are just nervous i mean if greece blows up and then starts the meltdown of the european banking system then what are you going to do as a business you want to hold your money you want to sit tight and not do business expansion plans until the whole scenario is clear and it's not going to be clear you know anytime soon by the looks of it you know ben if i can stay with you here and one of the things i find interesting and i read all of the financial papers is that capital flight from russia but is it why is there a capital flight from because russia is less attractive or is it because like you

say people need to hoard their money and they're withdrawing it wasn't something that's happening to all emerging markets very interesting i mean we dug into the capital flight and we had eighty billion dollars go last year forty billion over only the first four months of this year but part of that or half of that is foreign banks based in russia sending money back to their parent banks in order you know the local russian banks cash rich and they're bailing out their parents another quarter of their money is russia. companies abroad reinvest in their profits you know they're buying assets expanding in the more traditional markets and then again you get another quarter of that which is like real money leaving because of the political uncertainties here but the irony of the situation is that russia leaving money money leaving russia is actually quite good for the economy and so much as its hold on inflation inflation is at a twenty year low is holding down the value of the euro the ruble which is also making it easy for russians to export and so it's quite beneficial and given that

russia has more than five hundred billion and they can afford to bleed a little bit of money which is actually helping the economy along at the moment ok always the optimiser what about you simon i mean you know ben just gave a real mixed bag here at the st petersburg forum this year what do investors want to hear to bring money back into the country again we all agree that there are external shocks here but what proactive element can the russian government do to start bringing the money back in also predisposes great place to be in the summer. obviously many multinationals there. waiting with bated breath to see what president putin says. the new cabinet stays as is is a move forward we're seeing we're seeing you know there's a whole raft of new people within within the within the government now that said to many of them we're deputy ministers that are basically stepping up but you know for foreign companies want to see a little more action less and less words would like to see a substantial movement on things like you know corruption which is always said on the on the program we would like to see significant increases in infrastructure

there are many many projects that need doing across russia over the olympics coming up in the world cup coming up there are great opportunities that president bush himself has you know seek to said significant improvement in fifths or infrastructure needed we'd like to see that actually taking taking shape faster rather than sooner rather than later ok peter talking about infrastructure i mean how attractive is that for foreign investors me huge praja. huge amounts of money what kind of guarantees are they going to get their return on their investment. i'm jumping into the the r.t.s. of the mind thinks i'm jumping out right well actually first can point to one of the opportunities here and that is actually the f.b.i. side of the foreign direct investment side russia is receiving about one one percent of g.d.p. in inflows. on average over the last sort of ten fifteen years which is a basement in terms of numbers and what russia needs especially as to domestic investment and also look the chinese which are actually great in doing

infrastructure projects the sort of caveat is that it normally want to bring their own workers right but if you look at the overall investments that s.d.i. that's come into russia it's five hundred billion since one thousand nine hundred four when the data started to be collected all of that hundred eighty billion is cyprus you know what i mean all of your viewers what cyprus is what it is to be russian money coming back. into the left in the ninety's mainly and then coming back yes the chinese money is only two billion of that is amazing if you look at the size of the country and the opportunities that the chinese are going to go into africa because what they're after europe but apart from infrastructure they're looking for raw materials and oil and africa is the place to go because that's where they can basically manage to actually get hold of assets into infinity or well you know and you know i really like what simon had to say because you know the infrastructure is very important here but at the same time it's been a lot of money and it has to be a lot of trust your i mean is this the kind of next step that the russian of the

russian government has to push to bring huge amounts of money in our experience we're seeing activity course whole broad range of spectrum changes in business climate in terms of administrative areas bureaucracy you're a critic simplifications massive program this climate action plan has been put together two thousand and twelve two thousand and fourteen some really meaty stuff in there on corporate governance on building codes or a whole range of things if we can pull. off together by working with the government that plus good infrastructure projects really moves us forward i think it starts to get out of the mindset of what's wrong with rushing into the mindset of what we can change for the positive trying that's extremely powerful regiment on that know where we're going to go to a short break and when we return we'll continue our discussion on the state of the russian economy stay with our to.

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welcome back to the money i'm peter lavelle for a german let's continue our discussion on the russian economy before the forum in st petersburg ben if i can go to you you mentioned it in the first part of the program looking at political risk here when people are some ball in st petersburg there's going to be a number of academics there and businesspeople there and politicians want to know what kind of impact the recent protests have had on the current government thinking about reforming the economy what's your what's your take on it that's the point they are thinking about it i mean the the protesters have stood up and said we want to bit more say in how this country is run and the kremlin has to listen and it has

been listening i think the issue now is going forward it's finding a balance between the protest movement and their demands and how the government is going to react to that and i think the government side is going to be a mixed bag on the one hand they are listening and they've reintroduce a popular election of governors and which is a step forward which putin got rid of when he took over in two thousand but on the other hand they've introduced this new demonstration or which imposes big fines on people who do and sanction protests and it's going to be a balancing act between the protesters you know their frustration in terms of how much they get to get involved and against you know what the government actually does and delivers but i think all said and done and everybody agrees that the protests are a brilliant development it takes us forward and we need this kind of debate and the government doesn't need to engage in the people more and the people are standing up and they've become radicalized to the point where this can't be put back in the bag

and so therefore it's going to have to deal with it and it's the beginning of the civil society in russia which we haven't had for most of the twenty years i've been here peter you're an old hand like myself here how do you what kind of impact those do the protests. recent protests have been government policy because government policy even in the best of times moves slowly ok you can't implement demands immediately you needed to dialogue but so far we i don't think we've seen any impact because we always have been in a shift of government it's going to take time before they start to act i think that the major point here is that the government needs to manage expectations because during two thousand two thousand and eight put his first two terms in office he managed to increase wages in nominal terms thirty percent per year over the last three four years it's been ten percent per year people have been focusing and seeing you know bureaucrats and officials getting richer and richer. they need to manage these expectations in other words that people now expect perhaps put in to

be able to do the same as indeed over these last eight. skiing a lot how does an interest president up three hundred eighty eight percent in those eight years since motivated to look at made a bit of oil prices down so it's going to be a challenge so i mean what do you think about that i mean managed expectations oh my goodness you know a lot of politicians in the world would love to have this kind of situation both peter and bring up great points i will say you know we need to move to a more pure or a stick society here in russia you know the protesters of vans that now in many ways i disagree we've been in i don't think the government's really been listening i mean it's heard but i don't know whether it's actually sunk in and these are substantially in that we're still really to see any substantial changes and you know the next few years are going to be very very significant i mean if greece does blow up as we saw in your report your price goes down to eighty there is a huge budget hole all of a sudden we could see some civil unrest ok you know given you know you know all of

us on this program have been in russia for quite a long time and. the calls for reform are always out there but is it being said too loudly too often what reforms it is for someone that runs a large company and what reforms have you seen. seen quite a significant program over recent years the office of federal on bud's been looking after regional affairs hugely successful a fantastic opportunity to be able to get through bureaucratic red tape and get things changed for the better and a very open dialogue there much more direct access on business issues to various parts of the government to be able to get solutions in place and if you look at organizations like fee arc really starting to play a role in terms of offering positive suggestions that the government is accepting so i think there is differently an understanding from our perspective anyway in the government of the need for reform and some movements to start to go down that path but the agenda is pretty broad there's a huge amount that needs to be worked and i think from my perspective we've got to be realistic on the expectations what can be changed in what order to get us the

right place benefits go back to you if you were to have a pecking order of the things that needs to be done most in russia's economy and i'd like to point out when there's economic forum you know russia is in a very turbulent world why why what does the russian government and russian business have to say to the to the visitors in st petersburg come invest in this country as opposed to china or india or brazil what would be your spiel i think what needs to be done. is very simple it just needs a level playing field rule of law to get rid of the corruption to get rid of the bureaucracy so the people can come set up and give some sort of stability the stability and predictability and that's what you need to make business work but that process you know is going slowly the state has a lot of big projects sectors that it wants to push and tends to throw its own money at that which is not necessarily helpful but i think to come back to the bottom line and a bit has mentioned this and this is why companies like kraft are here is that

russia is now on the verge of becoming the biggest consumer market in europe and if you look across europe is the only dynamically growing profitable markets in the whole of the continent and also. compared to the other countries in the world this you know it's doing stream and that alone will bring investment people want to do business and this is the place to do business and the government just needs to bang on that message and make it easier to do it ok it's a very nice message with peter with me here in the studio how vulnerable is russia to the world in europe well i think the only give me a good scenario in a bad scenario ok. if we get a muddle through scenario. with greece because in the end we've never had an event like greece ever nobody really knows that's going to play out but it could open pandora's box. if that happens all president to be sixty five fifty. you know without any any hesitation or in my view. that's if if we force first for you he

actually said montreal scenario ninety eighty ninety dollars. but. the dependence on oil for russia has increased dramatically to in my view alarming level if you look at the non oil deficit to exclude the oil related revenues from the budget two thousand and four to two thousand and eight they were one point five percent of g.d.p. over the last three years more than ten percent of g.d.p. the dependence on oil is as has recently been level so that's really the key that matters when we don't have the domestic drivers in place i didn't message rather we have right now is politics the tense of a negative if we get the reform agenda going in frankly you know they don't need to do much to exaggerate and huge difference if we get that we're in a different scenario but right now russia is all about domestic factors. so i mean if i go to you know it seems to me sometimes it's russia interrupted because just when they get things going then you have the euro crisis in the backyard you don't know what's going to happen with that with the dollar. there's so many things going

on here we can interrupt russia's progress even when under the best scenario absolutely i mean and with russia still growing i mean you know the whole of europe is dying for growth rates of over four percent mustn't forget that you know russia is still a dynamic economy that's pushing for despite all the problems that it's facing i mean god knows what will work what we can possibly hope for should you know should we muddle through in europe you know we get stability and we get political reforms in this country we'll see significant bones forward you know russia russia is definitely moving in the right direction we just it would it would be nice if it was just a little faster and little easier but then everybody would like that benefit go back to you i mean let's go to the other side of the globe here a growth in china is slowing down when people go to st petersburg are going to be looking at china as well how much is that impact russia. well the tourney's story is dominating everyone's attention in so much as it's seen as a global driver i think to pick up on simon's point that's what russia needs it

just needs some peace and quiet you know everything else settle down and everyone just got back to work than russia would flourish as it is having to manage all of these things but i think all said and done i mean peter i think made the crucial point here is the lack of s. emmy's because then it means the russian economy is very dependent on a few big state owned companies and most of those a commodity commodity driven and at the end of the day makes russia very vulnerable it becomes a boom bust economy and if this crimean and it as he says it doesn't have to do very much can boost this domestic small business then that gives the economy some sort of robustness and given it's got so much catch up to do then it will become irrelevant what happens in the rest of the world just simply because of domestic business getting on the business or getting on with growing you run a company here and i think we all agree here having small or medium sized businesses is what really is missing in russia i mean running a business what we like to see the government do because these could be suppliers

for you and what not all kinds of help to you what would you wish list two or three areas i think there is an opportunity for the government to partner more with big business to set up schemes that encourage the growth of local suppliers so that these small and medium sized businesses can have the cover of protection of a big business to help them through the times the bureaucracy in the way things work or you got the opportunity to work on a local level with regions much more regular we have good relationships with all the regions we work in those are very positive the other areas to look at those barriers that exist are necessary barriers that prevent you from exporting from here you know we've got world class factories and we're not alone in having fantastic factories or coffee factories in most efficiently group anywhere in the world for example chocolate factory same deal how do we free them up so that you can get them exporting not just satisfy a local demand and therefore expand that capacity starts to diversify the economy has a whole series of. in partnership with a government possible and there are also reforms to tax law and things that make it more competitive to invest here we have alterations to property tax for example

getting rid of the eighty on exports is all series of things that really could make a difference peter i'm going to put you in the position of being flooded near puton addressing the st petersburg forum next month what's his scripts going to say what if you were to write it for him what would you say well i think you know we've touched already on this is a brand mentioned what needs to be done when i think the corruption issue is crucial because that comes back to the small business environment and there's nothing more important in my view to create a foundation for big business creating if you want financial industry networks is all done if you look at you know empirical evidence is done by small or medium size companies that will also attract the f.b.i.'s and also if you look at the export orientation in fact export orientated expert oriented countries tend to attract more f.b.i. than domestically oriented countries so i think the corruption is actually key and it but it has to be focused on you know in my view to also coincide with creating a better environment for enterprise to be allowed to be entrepreneurs that i think

is that ok so i'm in fact i've got twenty seconds you want to do that you're giving the speech i absolutely i mean the rule of law is fundamental i would i would push forward in a year we are there is a level playing field now that speaks to the protesters that were on the streets and also world seriously in trying to long term capital the infrastructure that we talked about the beginning the show all right gentlemen thank you won't you very much i want to thank my guests today and we wish for watching on the money see you next time instead of our team. and they. are inside the mall. in light and. isn't possible without. inner peace without hard work and. joy.