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Alexander Ivlev, EY (Ernst & Young): Russian business and foreign investors in the Far East - EastRussia | Interview

Irkutsk
Ulan-Ude

Blagoveshchensk
Chita
Yakutsk

Birobidzhan
Vladivostok
Khabarovsk

Magadan
Yuzhno-Sakhalinsk

Anadyr
Petropavlovsk-
Kamchatsky
Moscow

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Growth drivers for the Russian economy

EastRussia finds out which development models will be in demand in the Far East

Alexander Ivlev, Managing Partner of EY (Ernst & Young) for Russia, - what Russian business and foreign investors are looking for and what they can find in the Far East

Growth drivers for the Russian economy

- Alexander Vladimirovich, from the so-called "Big Four" of the world auditing companies EY shows the greatest activity in the Far East. What is the reason for such interest in the macroregion?

- Everyone is sure that the EY operating in Russia is a foreign company. But in fact, it is 100% Russian, 97% of our employees are Russian citizens, all leadership is Russians. If to argue in the now fashionable "industrial" terms, then we are a convincing example of import substitution. In our industry we produce an export-oriented product that is in demand on the foreign market: in all international institutions, on stock exchanges, in financial structures, etc. Naturally, we are developing together with the whole country, and the logic of such a move forward for us is a priority. We always go where we see clearly defined goals, and the Far East is one of such directions. We work with the largest players in the Russian and world markets, so five years ago we set ourselves the task of reaching the Far East. An office was opened in Vladivostok, a lot of work is being done in Yuzhno-Sakhalinsk and all other territories. The region is interesting, the prospects are tempting.

- And what are these prospects?

- In the near future, the Russian economy will have three drivers: the development of infrastructure, regions and entrepreneurship. In the 15-20 time horizon, Asia will provide approximately 2-2,5 to billions of middle-class people who, as their wealth grows, can significantly change the picture of global demand and, consequently, of the market. Demand will begin to change dramatically quickly and it is important not to miss this process and to benefit our economy: new consumers will need healthy food and environmentally friendly products, and will place new demands on the health care system and agricultural production. And in this sense, the Far East of the Russian Federation has unique advantages and opportunities. For example, in China it is almost impossible to grow "organic" products in the right quantities without pesticides and other "chemistry." In Asia, too many areas are generally not suitable for agriculture. In this sense, our conditions are simply gorgeous, they are a sin not to use. It is necessary to take into account the fact that, despite the global political situation (which, of course, cannot be ignored), Russia will continue to integrate tightly into the world economy.

For us, the experience of countries using similar models for the development of territories remote from the center is very useful. For example, Canada or Australia, where there is also a low population density, and the advantages are a strong mining industry and access to sea routes. This allowed them to create a good transport infrastructure, logistics hubs, etc. We can quite go along the same path - in fact, this is what the efforts of the Government, the Ministry for the Development of the Far East and business structures that are closely studying the investment opportunities in the eastern regions of the country are directed at.

- Do you also use "imported models and technologies" in your work?

- The standards of international audit and consulting technologies are the same for a global company. In Russia we observe them and therefore we issue the same high-quality products as our partners around the world are doing in the markets - audit and tax reports, consultations, due diligence - an independent evaluation of investment objects, including related risks, E. We have an extensive client base - from the largest Russian companies, including those working actively in the Far East, to the leading international companies.

- According to your observations - how does the business style of Russian companies differ from the western one?

- These styles are becoming more and more similar. Russian companies quite often now use international practices. For example, independent directors are introduced into the boards of directors of companies. The level of corporate management and operations of Russian companies is less like the old Soviet models. They often come to us to help us build a new business model that meets high international quality standards, and we are working on it, and such appeals year after year more and more.

This also applies to state-owned companies. In their leadership, more and more young people come with a "market", rather than bureaucratic thinking. For example, the United Shipbuilding Corporation (USC) was headed by Alexey Rakhmanov, who in his service record has not only experience in the civil service, but also worked previously in the corporate finance department at EY, studied at the University of Chicago. Young cadres come after graduating from prestigious Western universities, these people know how to think big, they are professionals in their field. And as a result - we see a lot of positive changes. I would just like them to happen faster.

- And will new legislative instruments with respect to the Far East help such changes - for example, “hectare of land”, TOR, Open Port of Vladivostok and others? Have they been asked for help by your experts?

- We did not deal with calculations for specific Far Eastern investment projects. But with the Ministry of the Russian Federation for the development of the Far East, we cooperate in the development of individual conceptual approaches and program documents. As for the effectiveness of any project - the main thing, I think, is not to reinvent the bicycle every time, but to use models that have proved their effectiveness under similar conditions. For example, in Southeast Asia all these tools work perfectly - and it can be assumed that in the Russian Far East they will also be in demand and help meet the needs of business and, in general, the overall development of the region. Let's hope that next year the economy will confirm the forecast of the Ministry of Economic Development and will really grow by 2 percent. The Far Eastern project promises great opportunities, this is a great achievement, both regional authorities and Minskostokrazvitiya, by joint efforts that developed the basic scheme of work at the legislative level. Through the port in Vladivostok will go large amounts of supplies, the entire infrastructure of the Far East from this will only benefit.

It is still too early to talk about the large-scale immediate return from the TOP, despite the fact that the legislative basis for their activities has already been laid by relevant documents of the federal authorities. In the long term, in my opinion, we can see the return from the most large-scale Far Eastern projects through the years through 5-7.

- But there are also the concepts of "political will" and "management culture" in relation to the state. While the work of various state structures causes investors a lot of criticism, they tend to withdraw capital outside of Russia rather than investing here. How to overcome such trends and is this possible in principle?

- Let's be objective: to say that in Russia "it is impossible to do business" is wrong. Now our country gives investors much more opportunities than 15 years ago. Legislation is improving, government agencies have started to work much better. Another thing is that you quickly get used to good things, and you always want the best, and criticism allows you not to stumble on the spot and not rest on your laurels. The greatest prospects now, in my opinion, are in such branches of the Far Eastern economy as air and shipbuilding, agriculture, logistics and the raw materials sector, insofar as it relates to high-tech processing of raw materials. And if we talk about investments, then, of course, we "went to the east" not only because of the sanctions of the West. Objectively, in Asia, demand is increasing and markets are growing. Therefore, even those investors (for example, Japanese), who for some time ignored us, soon, I believe, will return to our market. Many companies (in particular, Mitsubishi, Mitsui or Hamatsu) quite successfully work in Russia and now.



- Who now enters the "big three" of Asian countries, the most actively investing in Russia? And with what obstacles do they, first of all, collide?

- Japan, China and Korea. Their desire to work in our Far East is quite pragmatic: there are a lot of attractive sites for business. And problems arise largely due to the difference in mentalities and legislative inconsistencies. We have a division in our company that conducts research in the investment market, and we see such things all the time. Here is just one example of when beautiful plans never come to life. One of the Russian manufacturers bought equipment for his plant in China, I wanted to mount it myself - it didn't work out. We decided to invite the Chinese colleagues, but they did not go, explaining their reluctance by the complexities of the immigration and tax legislation of the Russian Federation. Very often partners complain: “Russians hold conferences, we speak to them, we listen, we agree on something, and nothing happens. Everything is purely educational, not businesslike. ” In the West or in the USA, the outcome of such forums is usually concrete projects and agreements. But the same Chinese do not like to waste time on empty talk, and are “sharpened by specifics” - a similar “near-scientific” approach scares them. In our reports, we present the views of foreign partners - and they often complain about the red tape of bureaucratic procedures, the opacity of Russian management schemes, and difficulties in interacting with local authorities. We need to learn how to work in the modern coordinate system, where there is no place for artificial barriers. I hope that the already launched cooperation programs (in particular, the concept of the Silk Road) will soon have a positive effect. According to the EY study "Silk Road of the XXI Century: Global Expansion of Chinese Investors", Russia was included in the 10 list of priority areas of Chinese investment following the results of 2014, taking the sixth line for the amount of attracted foreign investment from China. It is noteworthy that since 2009 year their volume has been steadily growing. In general, Chinese business estimates Russia as an attractive market. 73% of companies share this opinion, and among large businesses and Residents of such companies is much more (91% and 92% respectively). At the same time, every second of these companies assess Russia as a highly attractive place for doing business. The only thing our Chinese partners say in one voice is that our country needs to reduce the level of state regulation of the economy and put a barrier against excessive bureaucratization. At one time, the Chinese themselves did exactly that, largely determined the success of the "economic miracle" in this country.

It is clear that China and Russia have their own way of development, their views on the global strategy. But there are always points of contact that make it possible to work together successfully. By the way, such period already was in the history of Russian-Chinese relations in the 50-ies of the last century. But the main thing, than we can involve both Chinese, and any other investors, is clear and invariable, once and for all accepted "rules of the game". Stability. Reliability. Predictability of our steps. Any legislative or administrative leapfrog will be fatal for new projects. And the "know your customer" principle is the best approach in the joint business. Successful companies follow this logic, when they order us or other expert structures large-scale research of Chinese or other markets where potential and current investors are operating.

And about how serious the scale has taken today cooperation with businessmen from the Middle Kingdom, can give an idea a few figures. As part of the One-Way-One-Way strategy, in January, China proposed to implement the largest infrastructure project - the construction of a high-speed railway stretching 2015 7 km between Beijing and Moscow, which will run through Kazakhstan. The project provides for an investment of 000 trillion yuan.

A very important trend was noted in the report prepared by our company: if earlier Chinese investors were mainly attracted by mining projects, now their sphere of interests has significantly expanded. Investors are actively developing such sectors of the economy as telecommunications, media and technology, real estate, finance, agribusiness and healthcare. The trend towards diversification is also evident in the European market of mergers and acquisitions conducted by Chinese companies: in the energy and mining industry in 2014 only 10 deals were concluded, while in the industrial sector - 28.

It is to be expected that in the coming years a new wave of internationalization will fundamentally change the world economy, including through direct foreign investment from China. Their volume is expected to grow by more than 10% and will consistently exceed foreign investment in China itself, with the result that the country will become a net exporter of capital.

- A lot of noise has been done by the recent history of leasing out to the Chinese vast territories in Transbaikalia. Do you think, is it possible to give land in Russia to foreigners in general?

- This is a serious and delicate question. Legislators should work fine here, think over the terms and conditions of such a lease in order, on the one hand, not to damage Russia's security, but, on the other hand, to ensure that such deals are attractive to investors. If you observe the necessary balance, you can build viable and promising models for the development of our agriculture in the Far East. Perhaps, with well-written legislative rules, you can allow the investor to bring his labor to Russia for such work.

- EY in recent years has prepared several large-scale analytical reports relating to various spheres of the Far Eastern economy. These are projects of state scale. Do you have any business contacts with regional administrations, do they need your advice?

- And they need and work with them. We actively cooperate with economic and investment blocks of regional governments - both at the level of councils and recommendations, and on a contractual basis. In this case, the interest is mutual. I think that during the forthcoming Eastern Economic Forum, the topic of such cooperation between administrative structures and financial and economic experts will also find its continuation in the form of specific requests to us.

- Do you expect some "breakthrough" solutions and ideas from this forum?

- I will not guess. Let everything go on as usual. As a member of the organizing committee of the forum, I believe that this event is very important and it should have been held much earlier. We expect the forum to be successful and its decisions will give impetus to many positive and long-term processes, both in the Russian Far East and in the entire Asia-Pacific region.

EastRussia help:

EY is an international leader in audit, taxation, transaction support and consulting. In Russia and the CIS, the 21 office of this company operates (in Moscow, St. Petersburg, Novosibirsk, Yekaterinburg, Kazan, Krasnodar, Rostov-on-Don, Vladivostok, Yuzhno-Sakhalinsk, Togliatti, Almaty, Astana, Atyrau, Bishkek, Baku, Kiev , Donetsk, Tashkent, Tbilisi, Yerevan and Minsk), which employ a total of 4 800 specialists.

More detailed information is presented on the website: Ey.com.