Global Economics

Obama's Russian Business Plan


In meetings with Medvedev and Putin, Obama will seek an improved atmosphere for U.S. investment. That would benefit both nations, but the list of sticking points is long

When President Barack Obama arrives in Moscow for a highly anticipated summit from July 6-8, he will find a U.S.-Russia business relationship that has barely taken off despite exceedingly hopeful beginnings 17 years ago after the breakup of the Soviet Union. Notwithstanding a few notable ventures, the U.S. is now only the eighth-largest foreign investor in Russia.

The summit is intended to activate what U.S. Vice-President Joe Biden called a "reset" of relations between the former superpower rivals after antagonism deepened during the latter two years or so of the George W. Bush Administration. Toward that end, Obama is scheduled to spend some 10 hours with Russian President Dmitry Medvedev in addition to a 90-minute breakfast with the country's über-influential Prime Minister, Vladimir Putin.

While the Presidents are to initial agreements on arms control, transit of military supplies to Afghanistan, and nuclear energy, they also are supposed to drop by a simultaneous meeting of U.S. and Russian business leaders at Manezh Central Exhibition Hall. Yet on the business side, there is little sign of a thaw in the apprehensions of U.S. companies about the Russian investment environment.

Indeed, analysts say one of the main summit agenda items remains establishing a better atmosphere between the two countries. "It's far more important to clean up the atmosphere, to get rid of all those sticky fumes of anti-Americanism," said Pavel K. Baev, a research associate at the International Peace Research Institute in Oslo.

georgia is a major area of disagreement

In recent weeks, Putin has welcomed investment by Shell (RDSA) and France's Total (TOT) in difficult natural gas fields. But energy companies are attentive to the recent experiences of BP (BP) and Exxon Mobil (XOM), both of which have longstanding investments in the country. Exxon Mobil, for instance, has continued to be thwarted in its plans to export natural gas to China from a major investment in the offshore Sakhalin-I field because Gazprom has insisted that the gas be sold at lower prices in Russia.

Russia's renewed need for investment capital amid its sharp recession may lessen the likelihood of such confrontations. "When times are not so good, the opportunities are there," said a senior executive at a major Western oil company with investments in Russia, who spoke not for attribution. "The nervousness you have is, what happens in three or four years' time, when the price of oil is back above $100 a barrel? When the price of oil goes back up, it's as high-risk as ever."

Energy's tight connection with foreign policy is one of the most stubborn points of conflict between the two countries. Russia remains deeply hostile toward Georgia some 11 months after the two nations went to war—a conflict that has affected U.S.-Russian relations since Georgia is a key U.S. ally as a transit route for a giant oil pipeline connecting the Caspian Sea and Mediterranean. The U.S. seeks to deepen its ties with the Caspian Sea countries, while Moscow wants the U.S. to limit such engagement, viewing the region as a Russian preserve.

In addition, Moscow bristles at U.S. attempts to curtail Russian dominance of the natural gas supply to Europe. Russia now supplies some 25% of Europe's natural gas. The U.S. and Russia have squared off on the issue by backing rival natural gas supply projects that lead into Europe. Russia proposes a pipeline called South Stream, while the U.S. has traditionally backed a rival line bypassing Russia, called Nabucco, that proponents see as a way to diversify Europe's natural gas supply.

no sign of attitude adjustment

Some analysts had thought that the impact of the global financial crisis would cause Russia to moderate some of its foreign policy objectives, especially when those objectives include Moscow's plans to use its oil and gas as a way to extend Russian influence abroad. But there is no sign that either Russia or the U.S. will retreat on their positions concerning energy. "If anything, the crisis gives Russia more leverage in its region. It hasn't in any way changed Russia's attitude toward the outside world," said Angela Stent, a Russia expert at Georgetown University.

With Russia suffering heavily from the global economic crisis, it has a clear interest in welcoming greater foreign investment. U.S. investment could be especially beneficial in high-technology sectors, which Russia's leaders say they are keen to boost in order to reduce Russia's overdependence on oil and gas. For example, Rusnano, a state corporation that seeks to develop Russia's fledgling nanotechnology industry, has recently indicated plans to raise $1 billion with the help of Silicon Valley companies.

Another long-term Russia-U.S. goal is Russia's entry into the World Trade Organization. WTO entry would require the Russians to lower barriers to competition from abroad, and it would signal that Russia had matured as a player in the world economy. But Russia, concerned about the state of its battered domestic companies, now clearly wants to slow down the WTO process. In June the country effectively blew the whole idea out of the water when it unexpectedly announced that it was entering a customs union with Belarus and Kazakhstan. The Russians now want to enter the WTO only in conjunction with their customs-union partners. This new twist means Russia's accession to WTO has been put on hold for a very long time.

Deere, Boeing, and Pepsi ramp up

In non-energy areas of business, there will probably be some good news at the summit. Among U.S. commercial deals expected to be announced around the event are a $500 million Russian investment by John Deere & Co. (DE) in facilities to produce tractors and combines; a 50-50 joint venture between Boeing (BA) and Russian titanium producer VSMPO-Avisma (VSMO.RTS) to make parts for the 787 Dreamliner; and a $180 million investment by Pepsi (PEP) in a bottling plant in the Moscow region.

Still, it is European investors who have taken the lead in the areas of traditionally high investment in Russia. In energy, BP, Shell, and Total are the largest investors, with Exxon Mobil and ConocoPhillips (COP) the only significant U.S. players. Major investors in consumer products include European companies such as Ikea, Metro (MEOG.DE), Heineken (HEIN.AS), Renault (RENA.PA), and Telenor (TEL.F). (Those investments aren't always easy, though: Ikea just announced that it is halting further expansion in Russia for now because of administrative hassles and uncertainty.) U.S. investment—just 3.4% of foreign direct investment in Russia—is shallow.

A main worry of U.S. companies is a perceived failure of the Russian justice system to uphold the rights of investors and shareholders. "Medium-size companies—and I mean big medium-size companies—still have concerns about the rule of law," says Andrew Somers, president of the American Chamber of Commerce in Moscow. "So that's a competitive disadvantage for Russia. And until they straighten it out, it will continue to be."


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus