By Jaroslaw Anders
USINFO Staff Writer

Washington – Despite political tensions, U.S. businesses are flocking to Russia to take advantage of the booming Russian economy and transform Russia’s business environment, according to U.S. business leaders, but they add that within the new optimism linger old concerns about Russia’s commitment to free markets and civil liberties.

According to a recent World Bank report, Russia’s $1 trillion economy is undergoing an investment boom that increasingly includes domestic markets energized by a sharp growth in real wages and disposable income.

“You have wonderful profit margins. Everybody in Russia is making far more money than they are doing anywhere else,” Russia expert Anders Ǻslund told USINFO. He is a senior fellow at the Peter G. Peterson Institute for International Economics in Washington.

Of the $13.5 billion in new deals announced at the International Economic Forum held June 8–10 in St. Petersburg, Russia, $3.5 billion went to the U.S. aerospace giant Boeing, which plans to sell 22 of its newest B-787 “Dreamliner” passenger jets to Russia’s largest airline, Aeroflot. Boeing is pursuing a number of cooperative deals with the Russian aerospace industry.

TRANSFORMING BUSINESS CULTURE

U.S. companies also are active in the vibrant Russian consumer market, experts say. Russians “are really reveling on the consumer side, purchasing everything - food, clothing, apartments,” Andrew B. Somers, the president of the American Chamber of Commerce in Russia (AmCham), told USINFO.  

Both General Motors and Ford are building and selling cars in Russia. Other U.S. consumer-sector companies active in Russia include the Coca-Cola Company, Johnson & Johnson Consumer Companies Inc., Mary Kay Inc. (a cosmetic company), the William Wrigley Jr. Company (a chewing-gum manufacturer), Citibank and many others.

The U.S. entertainment industry, long present in Russia in the form of imported Hollywood movies and music, is initiating local production. The Walt Disney Company is planning to film its first Russian-language movie with Russian actors and to launch a Russian-language television channel.

In 2006, U.S. direct investments in Russia had grown to $11 billion, and according to Somers, the U.S. presence is beginning to change Russian business culture by promoting such key values as legal compliance, compensation based on merit, business ethics and corporate social responsibility.

In Somers’s view, U.S. companies in Russia are “pretty disciplined” in terms of dealing with corruption. He cited a case in which a large U.S. company fired several of its employees for taking kickbacks from suppliers. The company “made a public event out of it, so that everybody gets the message,” he said.

U.S. law forbids U.S.-based companies from engaging in corrupt practices anywhere in the world, even if it puts them at a competitive disadvantage.

ADJUSTING TO THE IMPACT OF POLITICS

U.S.–Russian business ties develop irrespective of political changes in government-to-government relations. Still, political disagreements and the Russian government’s often arbitrary actions can have a negative impact on the business climate, especially in “strategic” sectors such as energy or aviation, experts and business leaders say.

For example, the Boeing deal has been delayed because two key Russian partners have been accused of transferring military technology to Iran.

In addition, the Russian government has been rewriting some energy production-sharing agreements and pressing foreign partners to sell their shares to state-owned or state-backed businesses. Those practices, experts say, can have a chilling effect on foreign investors and hinder healthy competition.

But Somers said major U.S. energy companies can adapt to Russian rules “as long as they know what the rules are.”

Experts and investors say Russian authorities have done much to clarify those rules and to make the Russian environment more investment-friendly. In July 2006, they began allowing free flow of capital into and out of its financial system and they are overhauling their tax regulations.

Still, several major problems remain. For example, there are continued problems with corruption and intellectual property rights protection. According to the U.S. Trade Representative’s office, U.S. industries might have lost more than $1.9 billion in 2005 due to copyright violations in Russia.

While calling for stronger U.S.–Russian economic ties, Commerce Secretary Carlos Gutierrez pointed to “a vibrant media and independent courts” as factors that “would send positive signals to potential partners in both countries.” (See related article.)

Ǻslund echoed the views of many when he said enterprise conditions in Russia are improving and many foreign investors find able partners among Russia’s “progressive, sensible mayors in good cities.”

“Russia is becoming more educated and much wealthier by the day, and its rationalizing” its economic life, Aslund said. The politics sometimes gets in the way “but market economy wins,” he said.