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Daily Mail: Not much love from Russia

James Ashton,
11 April 2007

Russia’s bully-boy business tactics risk becoming as familiar an export as vodka and furs as the former Soviet state looks to become a player on the world stage. 

Even those at the icy heart of the Kremlin acknowledge its companies have to reform, or at the very least brush up their public relations, to woo allies and investment.

Leonid Reiman, telecoms minister and a key ally of president Vladimir Putin, admits: ‘There are quite a few companies who have this aggressive and negative appearance. They understand themselves that they have this problem and they are trying to work with it.’

From a distance, it seems they are not trying hard enough. After all, under cover of environmental concerns, energy giant Gazprom thought nothing of edging Royal Dutch Shell out of control of the lucrative Sakhalin-2 gas field.

Chunks of Yukos, once Russia’s largest oil producer, will be auctioned next month after it was seized by the state for failing to pay a spurious £14bn back tax bill.

Across a range of industries, threats and legal wrangles make operating in Russia a daily headache. Of course, with its welter of natural resources and wealthy middle classes, the attractions to Western companies are clear.

Telecoms companies were the first to tap foreign investors for cash when VimpelCom, Russia’s second largest mobile operator, listed its shares in New York more than a decade ago.

Reiman is keen to smooth the path for the second wave. Annual growth of 30% per annum, led by a take- off in mobile phone use, should be enough to convince many to stick a toe in the sector.

However, it may be harder to find takers for Svyazinvest, the Russian equivalent of BT that is soon to be privatised. Billionaire financier George Soros labelled the company ‘the worst investment of his life’ when he briefly owned part of it a decade ago.

Reiman realises his phone companies – still largely controlled by powerful oligarchs feared for their strong-armed business practices – need to overhaul their methods to play on the world stage.

Global operators, such as Vodafone, fear they could end up falling down a mine shaft if they rush into the Russian market, which already has 148m mobile phone customers.

Meanwhile, local operators such as Sistema and Altimo have high hopes of buying stakes in foreign firms such as Vodafone or T-Mobile owner Deutsche Telekom.

And a surfeit of Russian firms are queueing up to list shares in London or New York. All this activity means ‘corporate governance’ is no longer a dirty expression in Moscow, at least on the surface.

Reiman added: ‘We support the idea of Russian companies trying to participate in European or international projects. It is a very positive thing. But sometimes the methodology, how they are trying to achieve that, from our point of view is not quite correct.’

Altimo, the telecoms arm of Alfa, the industrial conglomerate controlled by oligarch Mikhail Fridman that has partnered BP in oil exploration, is one of those under the spotlight. In an effort to brush up its reputation, Altimo has recruited luminaries such as former foreign minister Lord Hurd and ex-Vodafone veteran Sir Julian Horn-Smith to its international advisory board.

Vodafone boss Arun Sarin is wary, preferring to invest in India instead. Last year he said: ‘Everytime we look [at Russia] we are unable to find the appropriate vehicle, or just feel comfortable enough that we want to make an investment.’

Other investors are making money but feel bruised by the experience. Norwegian operator Telenor is waging a war with Altimo over the future direction of VimpelCom and an operator they co-own in the Ukraine. Reiman himself is at logoff-with Alfa. It alleges he owns 25% of another mobile phone firm Megafon, through an offshore Bermuda trust, which is seen as a stark conflict of interest.

In a typical Russian tangle, he denies the claim, but is being investigated for fraud. Alfa’s boss Fridman is himself facing racketeering charges in New York.

Nevertheless, Reiman’s ministry has successfully lured technology firms to Russia with tax breaks. No wonder the Department of Trade and Industry recently funded a trip by smaller telecoms content suppliers to Moscow and St Petersburg.

Despite their curiosity, there is little doubt that Russian business life is rife with bribery and corruption. Politics and business coexists in uncomfortably close quarters – as shown by Putin.

Reiman thinks Westerners should be patient. He adds: ‘There is a joke that the reason why the grass in UK is growing in such a nice way is because it was cut for 300 years.

‘The same goes for legislation. We have a basic model in place. It has some big gaps today. We have to study the gaps and adjust this gradually.’

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