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Ms Nabiullina briefed Dmitry Medvedev on measures being taken by the Ministry of Economic Development to build up conditions for encouraging investments favourable to modernising Russia’s economy and launching innovative businesses.

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President of Russia Dmitry Medvedev: Ms Nabiullina, last time we met was just before the New Year at a meeting on the year’s preliminary results. The bottom line for us is the investment climate. I expressed what I hope is our shared view that none of us can be satisfied with the investment climate in our country.

I will soon be travelling to Davos, where I will meet with foreign business leaders and make an extensive policy speech, but those are external factors. The internal investment climate factors are the environment we create, the faithful execution of our decisions, and, if you like, a certain psychological atmosphere that exists in our country and which either encourages or blocks investments. The situation in this sphere is not perfect and we are all aware of that. We agreed that new proposals would be drafted in order to move forward on all these fronts.

What can you report on the current situation? I understand that this may be preliminary information. What steps should we take in the near future?

Economic Development Minister Elvira Nabiullina: Creating a favourable investment climate is certainly a top priority for us, and we are working on the task you have set us: to prepare a package of additional measures because the current measures are clearly not sufficient to produce a serious positive impact. Investment indices tell us about the situation in general terms, so I will start with that.

What changes did we see with investments in 2010? The figures are as follows: the volume of investments was 10 trillion rubles [over $330 billion], but gross capital formation as a percentage of GDP is 21%. This shows the extent to which the economy is investment-oriented. In comparison, this figure in China is over 40%. That is, this share is much higher in countries that are undergoing modernisation. Therefore, 21% is certainly not high enough.

During the economic crisis, investments fell more than GDP. In our country the decline was 16.2%. In 2010, we saw growth that was higher than we expected in early 2010. Our forecast was around 2.5% but in fact the growth was 5.9%. So we can probably say that there has been a more or less normal recovery of investment activity.

This process has occurred in many countries. The United States saw quite a sharp drop in investment, and in 2010 they had 3% growth. The decline in investment is still continuing in the EU. However, there was no drop in investment in the countries undergoing modernisation, the countries to which we compare ourselves in many ways, such as China and India. Therefore, it is very important to see these figures in perspective. I believe that they are not high enough, even though formally they may look relatively good.

”There are three components to the investment climate: first, there is legislation, second, the officials’ performance and third, a healthy judicial system, which can protect business owners, both companies and self-employed individuals. All three of these areas certainly must be improved, and all three areas require certain steps.“

Dmitry Medvedev: In your opinion, are these long-term investments or is it to a degree speculative capital, which was redirected to promising markers at the start of general economic recovery and financial growth? Russia is definitely a promising market.

Elvira Nabiullina: I am talking about investment in fixed assets, which is non-speculative capital.

Dmitry Medvedev: Therefore, these are investments we want to attract.

Elvira Nabiullina: Yes, these are investments we want to attract. However, the figures for the pre-crisis investment growth rates were much higher: they were two digit figures at the time and reached 22% in 2007. But the quality of those investments raises questions, because what we need is not just any investments but investments in modernisation, and it is very important where they are directed. We have been conducting studies on the types of investments.

On a positive note, I would like to mention that 38% of companies talk about energy saving as an aim of their investment projects, that is, energy efficiency has become an incentive. Cost reduction is also becoming an important factor, rather than simply replacing worn out equipment and assets, and so on.

It is also very important to monitor the sources of investment, to see who is investing. Currently the share of our domestic investments has increased slightly, which is understandable because financial companies have begun to recover and to show profits. But the share of bank loans in overall investments is too low, about 9%; that is even lower than the share of state investment, which is 20%.

Dmitry Medvedev: This is an obvious imbalance.

Elvira Nabiullina: This reflects the investment climate. A significant share of investments is financed by the state. In order for banks to finance investments we need a better investment climate. This figure, the share of bank loans, is far lower than in many countries.

Dmitry Medvedev: And what do you think should be the optimal proportion between investments financed by the state and by banks?

Elvira Nabiullina: I believe that the optimal share of bank lending would be 20%. Therefore, the recovery of bank lending to finance investments has been slow. In addition, we have imbalances in the sectoral structure of investments: about one-third of investments are made in the fuel and energy sector, whereas investment in other sectors is much smaller. This is also a reflection on our investment climate.

Dmitry Medvedev: Has there been any improvement in the sectoral structure of investment as compared with the period before we launched economic modernisation? Or have the changes been insignificant so far?

Elvira Nabiullina: There are some changes but not significant ones. For example, there is an above average increase in investments in engineering and communications. The share of investment in these sectors is very small: it is less than 3%. This shows where investments are being made but we can see that the growth in these sectors undergoing modernisation is higher. Investments in the social sphere have also been higher than the national average.

Therefore, the investment climate is our absolute priority and we implemented a number of measures last year. I think that the key steps that have started to produce an effect and will probably continue working in the coming years are related to the improvement of the migration legislation. A law was passed on improving customs administration, but the law is one thing, and its effect in reality is quite another. Our task this year is to make sure that these laws are effective.

In my opinion, the priorities this year should be to simplify the procedures for obtaining building permits (this is one of our key areas where we still have much to do) and to improve the regional investment climate. We are currently actively working with the regions, because the investment climate is very different around the country. It is clear that there must be certain federal initiatives, but a great deal depends on the regions as well. Together with the business community, even on its initiative, we have developed minimum standards for the regions’ investment climate: the steps to be taken by the regional authorities in order to improve the investment climate. Therefore, some measures have already been prepared, while others are being drafted. We will be ready to report back to you shortly.

Dmitry Medvedev: You must continue working on it because it really is a complex problem. We all realise that it cannot be resolved in six months. To be frank, it is extremely unfortunate that the investment climate in our country has been changing very slowly despite obvious achievements in economic development. Moreover, the post-crisis recovery has been successful on the whole, comparable with other countries and better than in many European states, although it has been slower than in several Asian nations. However, the investment climate remains quite unfavourable.

Generally, there are three components to the investment climate: first, there is legislation, second, the officials’ performance and third, a healthy judicial system, which can protect business owners, both companies and self-employed individuals. All three of these areas certainly must be improved, and all three areas require certain steps. I also have some proposals, which I will tell you about later.

Elvira Nabiullina: I would also like to mention a factor which may not be directly related to the investment climate, but provides more certainty for business activities.

Dmitry Medvedev: In that case, it must be related.

Elvira Nabiullina: It is the Executive Order you have signed on the establishment of a unified accreditation system. Accreditation is an extremely important market mechanism. Its effectiveness regulates consumer confidence in products and business confidence in manufacturing those products. At present we have a very intricate accreditation system, and it hinders international recognition, including the recognition of our certificates abroad. In order to enter foreign markets, companies need to undergo the entire certification process again. Creating a unified accreditation system is a crucial element in protecting consumers, reducing business costs and enabling our businesses to enter foreign markets. Therefore, it is an important Executive Order.

Dmitry Medvedev: Good. In that case this Executive Order will play its small part in the overall process. By the way, returning to the accreditation and certification system: we must finish our efforts on the modernisation of technical regulation, because, in fact, it is also part of technical regulation in the broadest sense of the word. We have achieved a few things in this area, amended the law, but difficulties still remain. I get reports about this from the business community. It is vital to complete the technical regulation reform.

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