hello and welcome to the money with the business of russia is business i'm peter lavelle with the start of two thousand and fourteen economists c.e.o.'s and investors are finalizing their plans for the new year the past year was a bit bumpy but two thousand and fourteen should see the russian economy rebound and the showcase called salty may make more than a few investors have a fresh look at the russian market. to discuss the russian economy i'm joined by robert may he is the managing partner at robert may consulting group we also have been heiress he is the editor in chief of business new europe and we also have john hello big he is the managing partner of a group ben let me start out with you what is the major theme you're looking for in two thousand and fourteen in one word investment investment we need to wait and

wait ok robert in one word yes what am i looking for here i think more of the same stagnation probably speculation ok john labor productivity ok why investment investment is the achilles heel of the russian economy and we've had this horrible slowdown last year was the rushes and and as i read this and surprised everybody on the down side you can reverse the story and the reason is the investment just stopped i think it's to do with the sentiment that there's a lot of uncertainty and people without being able to look forward to the future with any kind of idea of where we're going to go a lot of this was just in the middle of last year it was self-induced where they changed gears they started going for what i call russian austerity is the hope of more quality growth in this year what is complicated i mean there's a lot of things a lot of factors that went into creating this atmosphere of. pessimism or

uncertainty you know we had horrible external conditions we had threats of another meltdown in the mouth both internally and externally. we had the start of the anti corruption drive which again introduced more uncertainty about people's future so everyone sort of stepped back and waiting to see what happens and if investment picks up then that will become a driver or rather it needs to pick up because we need that as a driver the consumer story has been the driver it continues to be the slowing is losing its pop essent stagnation of the economy still grew just was basically flat and most economists the consensus is up to three percent g.d.p. growth this year so it will be slightly different than last year and we're going to see i think the reason i said that is because you would expect much more from the russian economy if you look in the past five to seven years i mean it was doing actually last year was the exception to the last seven years right yes so i don't see that improving so what i see i don't see the global economy really accrue

improving to such a degree that it will have a positive effect on the russian economy so i would expect the russian economy actually to do worse and when you talk about the russian economy what are we talking about really i mean the bulk of it is all gas natural resources so if that's doing well on a global scale then russia will do well but the remainder of the economy i mean production is down i think russia has not reached really the point it needs to be productivity but that's going to give the petition for more reform i mean it's a political issue is what it's all face it i mean there are challenges here president putin came out at the end of last year in december and said look we have our own domestic problems before it was more external issues now he's saying we have to deal with them domestically job. yeah well i don't share at the general sentiment that russian economy was particularly bad last year we had one hundred percent growth and no budget deficit. sit there and just state it's not indebted

full employment compare with what's going on in the european union so i think that people and i missed the point thing is that russia has read the story level of development and now it's time to find you and business and what needs to be fine tuned what's the top of your list for this year well management practices because awful management practices in russian companies also look for and i want to hear. labor productivity is very low and when there is full employment with low labor productivity that's really what's keeping the economy down when you examine the cup and super instead the first one is that a lot of the problems in we've seen in russia a macro problems there but macro numbers if you actually live on the street people's incomes continue to ride by ten percent and there's no two unemployment to

speak of if you want to you can have we're in moscow across the country i mean you know the labor market is driving tight which is a consequence of this lack of investment but you know for the people on the street life is actually been pretty good and you compare that to europe where you go fifty percent youth unemployment and riots so from the ground up it looks pretty good so the problems are major macro problems but john puts his finger on one of the weaknesses which is the lack of productivity you know russia's productivity is a third of that in the states but the world bank did a study and said most of that gap sixty seven percent of the gap between russia and the states is simply due to bad management and that's something that needs to be fixed it's not easy to train people how to run their companies better but that's where a lot of the progress could be made and it can be done at no cost it doesn't cost any revenue do you don't you know i think there's also a double edged sword here when you talk about salaries going up because you also have inflation and it's very expensive to live here so you need to. so larry just

to maintain a good standard of living the second thing is russia used to be attractive for investment because we always said look at it it's cheap labor but it's not the case anymore so i mean it's more of a negative i think than it is a positive for the economy the big one of the concerns now is if its economy doesn't really grow i mean two percent even ok that's fine but if consumers start spending less or if they find that because of inflation and if you look at the ruble right now the way it's dropping i mean i wouldn't want to be someone holding rubles i mean if you're looking kind of exchange rate basis i don't see more reason to be concerned then to be positive or the slow pace of growth is a problem because of this rising wages are growing so fast and it means that you need faster growth to compensate for that because if you don't then what happens is that wage growth is squeezing all the companies and unless they're expanding faster to make up for that then they're getting into a more and more this is an opportunity john isn't it as well i mean you can it's long as the economy was growing in people's incomes are going up and saying

everything is fine the way we do business here and we've just heard from our other guest here it's because of the way business is done here is that we're going to see a faltering or a slowdown because we still have growth here this is an opportunity to modernize these companies because you have to now it's not it's not a convenience it's a necessity yes absolutely i come from tired feel and we have a saying in their gut siberia will teach you that when you're forced to do something you have to do and now russian companies are just forced to because. as our colleagues are saying the witches are going up faster than revenue growth so you kill yourself if you don't make your process is an organization more efficient. but how do you do it. well it's the environment isn't it's darwin's forces that you do it or you die so they going to have to do it and those

who don't do it will die and that's you know competition this is a free market that's how it works and really we've been this is the first time russia has been in the i'm glad you brought that up because i think that you know we have to put it in perspective you're going back to what robert had to say because for solid decade we had a growth growth growth story and a lot of these issues that we're talking about right now were not considered very important because you had growth you had money coming in as he had economic expansion so this is i look at this is as an opportunity because the same things are going to happen now you have to start fine tuning it as we heard from joe i mean basically these had a very good stream of luck over the past several years good policy ok you can call it good policy but i think it's a lot of. money as well i mean the torrent of petro dollars just meant that you could run a business badly and still make money because there was so much money around and exactly and that's gone and i think now the have to realize if you don't innovate if you don't implement some new practices really so you can be competitive not only

domestically but also internationally i mean you're still going to be bogged down by the natural resource this. black cloud hanging over your head on the one hand it's a great pot of gold but on the other it kind of creates a bit of a malays where you don't do anything in though its credibility at least is over i mean it's do or die no. i absolutely agree that you either do it or you don't eat me in seoul so that there is still a fortunately for your company to enter because when you can i would come in with. business attitude good management you can kill the big amounts that are standing here. ok i mean let's look at it in. realistically if you're an investor you have a money a certain amount of money you want to put it somewhere and you're looking around the world because i mean you have germany trying to promote themselves japan the

united states everyone saying look we have great conditions so you're making a choice there was just this ranking came up the other day russia is number forty three so you're looking for a while you're looking for work and. also you can change in a way and get one up but think about it your number forty three so if you're making a choice as a partner in a partner as an investor saying i don't want to buy it by all the rules and the players again are you going to pick number one or top down are you going to say look i'm going to go for number forty three because i like a challenge to come to this market i don't know if they still look at the german. i mean they're all here and they flooded in because it's the biggest market in europe by a long shot it's like fifty percent bigger than germany with one hundred forty three million people but however i mean you take the point if you're if you're picking and choosing which market i'm going to go to than russia because of his horrible image is going to be down on your list but if you're a big multinational then you have to come moreover if you're a big european company you have to come and that's been the bulk of the investment

so far it's the large companies and we need is more a sort of general groundswell of smaller companies and entrepreneurs because the irony is that once people have come in investigates they're very happy you know once you go through selling out because they make really good money but people don't know so they don't come and look but i agree with you because some of the larger companies feel they have to be here because if not they're just giving the market up to the competitor and it doesn't make sense that they really need to be here but you need more you need a groundswell you need people to find like while the conditions of really improved it's a good place to do been the margins are great once you're here. absolutely. and i were actually actually say traditionally they have been great now because of the which the growth they are not so great anymore but they can be if you do it better ok on that point gentlemen we're going to a short break and we'll continue our discussion russia's economy and stay with our team.

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lists lists lists lists lists lists lists . welcome back to on the money with the business of russia is business i'm peter all about remind you we're talking about a russia's economy in two thousand and fourteen all right let's talk about what two letters here the r. word and the c. word we're going to start with our first reforms what is two thousand and fourteen

in reform have to do with each other if anything what we agreed that we're living in a more hostile environment now and the easy money is gone and going forward then businesses are going to have to change to cope but you know in the past bad government didn't matter because you are making so much money and now bad government does matter because it becomes a drag on your growth eats up your resources when you should be concentrating on boosting your profits so the government for the first time is in the front line and what it does actually makes a difference and it needs to retain acknowledges this is a well to do research for the first time in his say the nation speech in december he said look you know problems are internal we need to fix them and he's highlighted this world bank doing business ranking and improving russia's but you know that's sort of emblematic of the kremlin's renewed focus on structural reforms and we've always talked about it and where russia falls down is always on the implementation but certainly the rhetoric is saying they they realize the problem

and they want to do some and russia has gone up from one hundred twenty to ninety second it's now the easiest of all the brics for doing business according to the world bank whereas before it was the hardest place to do business but we need a lot more of that if we're going to get back to you know four percent five percent growth over. i mean i think you russia is one of these unique places where there is there's really no fine line between the government in business any longer and i think this this is a problem because you have a situation where the government can decide whether your company succeeds or fails whether you go to jail where you get out a deal i mean there's there's there's no you could you see used to be able to say there's a fine line between government and its role in the economy but here is not the case there's much more privatization needs to be done and you need more well they said when the market conditions are i understand along ok being i mean again you go back to the stories of the nine hundred ninety s. when things were sold for a song and so there's a quite a bit of a sensitivity let's put it that way another selling state assets for

a song again but i think for foreign investors are looking at not only the institutions in place but the rule of law and that it's actually practiced and i think that's an important part for most foreign investors because more and more people do go to the courts for redress of issues that they feel i mean in civil matters and in business matters i mean that gets of actually very controversial thing confusing to the major courts or in this country. i think that the state of the rule of law is one of the greatest success stories. of it. russia because in the soviet union and there were no independent of course they were actually no laws. no legal system and in never in a real sense from one thousand nine hundred one they started implementing a totally new system of law and in twenty years it's gone up to a very high level all the international lawyers practicing in russia agree that russian ports are fairly good in the world but that's one of the things that russia

does what a contracting foresman russia ranks in the top ten but it's undermined i didn't read that in bloomberg then why no and it doesn't fit with the rates it does it moreover it's all very well having contracted for some. but then that's undermined by the corruption because the system is set up in order to. extract money from you and your country it may be in force but then you have other problems and again the government's turned its attention to that because it's probably the major drag on growth of the program that's the c word john where do we stand on that in two thousand and fourteen but you know it's kind of ironic because the more the state officials talk about cracking down on corruption again that scares off for investment because they don't know who's going to go you know who's going to be investigated who could potentially be arrested or even worse really it's a very odd situation to have because that also is something that is

a barrier to foreign investment you want to see how things are going to clear out. the crackdown on corruption is to very dual edged sword because in fact it's been very successful had to difference to crack down on corruption so successful that it's actually putting down economic growth we see it clearly because in the high end. market. real estate this election really areas prices have plummeted because i think. for middle class apartments the. price is still and i think that's because less corruption money is coming into real estate and those who have corrupt money are afraid and they want to sell and take the money out. so corruption is definitely. it's the fight is going on and going on very well here what people

don't understand is that you need time. twelve years ago russia was a total out with no state power or power victim and now during putin. being gradually put in place the rudiments of state and that's why only three four years ago. really. the fight against corruption could start so he feels that give it a little more time in corruption will dissipate i mean corruption is clearly permeates the society here at all levels from the traffic up to the highest echelons of government we are going to go ahead to next moment and traffic up. in from two thousand and eleven two thousand and twelve traffic fines both in mantle fined and the volume of money went up five times. that the police corrected five times more traffic fines in the morning the one of the fine or so it

made the amount of tickets and money it means that there has been a huge progress in that area i don't know i mean i live here day to day i've been here twelve years and i can't see much of a difference in what i certainly do i mean all he sees there's any room for his parents so you know there are a lot of studies that show that it is the every day level corruption is it has dissipated i mean there are certainly other elements of the society which i found to be. just gone from being the most corrupt in the transparency index which is the one everyone close to being the least corrupt of eastern europe however it's still a whatever it is i think place hundred twenty seven out of a list of a hundred eighty so it's still not good. but then if you took to the investment bankers they say look if you compare russia's corruption on a per capita basis this is line and russia is exactly where it should be along with everybody else and so it's really no different but it is

a horrible problem nevertheless the government has started this. you know we're on the one hand we have contracts and forstmann on the other hand people are going to jail for the first time losing their jobs but i agree with your assets also have done it's a generational change this to take thirty years just because once it's out there it's incredibly difficult to stamp out gentlemen i want to change gears of before we end the programs talk about sochi. it's a big it's a big event for russia it's a showcase of entier but can we put it into economic terms we talked earlier in the week investment in infrastructure in this country has been immense the games cost six to seven billion dollars not to fifty billion that everyone wants to talk about but that fifty billion has been major infrastructure development this country in the last decade yes. the cost of organizing the olympics building the stadiums and these things cost. seven billion dollars and then there's this if the billion

dollar figure out there which our western press claims is the cost of organize it's not all and not all that it's deposited investments have that have come in to search area thanks to. only six you know. you didn't build it again one thing about business people going back to obama's campaign. the russians have built quite a bit in the last seven years leading up to sochi that is that does that help is that interest investors at all a little bit well i think people have missed the point here i mean these sports events there's not just such i mean so she was the test case that they were the one they started with is that these things are being put as a template for regional development moskos welt of a and st petersburg to what we're talking about the rest of the country which is ignored largely and what they've done is they said look we're going to host this big sports event so we need

hotels trains airport airports everything and we're going to fix everything but we're going to do it in the framework of this event moreover we're going to have thousands and thousands of foreigners come and we're going to be inspected and we're going to be held to international accounts therefore if you steal you and your bridge falls down if you just if i gave you a contract you're british you know but if you get happens in the middle of a ninety six everyone's going to care a hell of a lot and so we started with sochi and then the world cup and turning eighteen we're talking about eleven cities which cities are they had to be the big regional centers the most important cities and it's not just. you know we've got the rowing championships we just had the university world. one thing after another so there's some one driver to modernize these different regions and parts of the country here which you know from what i've seen as being quite effective we'll see how the games play out but how do you go from this number of seventy billion to fifty billion i mean you're saying this is foreign. mentor this is i wrote example he's been one of

the six to seven billion for the games itself half of it is private investment ok even that has been missed by what mr western media what was the fifty come from the airport i mean the this is this is one of the myths about the funding here is that when there are new airports in russia not just in sochi in all of russia and they've been can be have been conflated is all being the same thing this is been a huge misrepresentation of the olympic games in western media and we've seen a lot of infrastructure built in russian a lot of this goes a specific example with the bid for the world cup which i think russia put in a twenty billion dollar bid but just the high speed rail links between those eleven cities is going to cost sixty billion and that's the point is that you know all this other stuff is going on top you know when you're building it's not just putting it if you're into doing it in germany you just need to build a new stadium because everybody does it i should say we didn't spend fifty billion this sort of the olympics to just say that it. announced it very clearly

a couple of days ago let me say seven billion dollars has gone to organizing the olympics the same figure that went to vancouver that's organizing ok to be doing building stadiums and their infrastructure on to staying on top of that they've built ten thousand new hotel rooms in two years which is. as much as they've built in helsinki during two hundred years and they've built highways. mountain road on a railroad thirty kilometer tunnels. you didn't need knows but the infrastructure to organize the games all right john shows we're going to talk about this after the fact next month many thanks my guests and thanks to our viewers for watching us here on the money see you next time and states are.

values are maybe also reflected the massive surveillance operation that is going on when we're talking about defending against terrorism which ultimately i think is it's where is a catch twenty two right because you don't want to take a program away that is saving people and creating a safer environment but at the same time you know i truly believe that we all have a right to freedom i believe we should be surveilled etc. i do. tanya. well tell me how you are my little grandson.

i don't like i don't like. being cut off. except as an ecovillage that the spiritual side is destructive. i try to convince her and try to preach that it was a sect but it's dangerous and she had to leave it was a story she had lost her mind. love you she will come back i know it was and i will wait but even if it means i must wait until my dying day. according to a new oxfam report the rich are getting richer at an alarming pace middle classes all over the world are under pressure and the poor well are only getting poorer with growing income inequality how can we expect democratic institutions to survive

not to speak of maintaining social tranquility is it time to start broadly sharing prosperity. breaking news on r t ukraine's president viktor yushchenko be a chance offered one of the leaders of the protest movement arseniy yatsenyuk the post of prime minister is also agreed to make key changes in the constitution that's another round of crisis talks with the opposition we go live to kiev very shortly. this is our international live from our studio center here in moscow where it's just ten ten pm and eight pm in ukraine where the breaking news is that the country's president viktor yushchenko bitch has invited a leader on.