INTERVIEW WITH DEPUTY MINISTER OF ECONOMIC DEVELOPMENT AND TRADE KIRILL ANDROSOV ITOGI WEEKLY, P. 36-39, NO. 30, JULY 24, 2006

(Federal News Service (Russia) Via Thomson Dialog NewsEdge)

INVESTMENT FUND ALLOCATION

The Russian government is shortly to approve four projects to
be financed out of the Investment Fund. In an interview with Itogi
Deputy Minister of Economic Development and Trade Kirill Androsov
has been speaking about the main areas a government commission has
singled out for investment.

Q: First, could you answer one question: are you a liberal or
an interventionist in terms of your economic views?

A: Do you call interventionists those who advocate active
state interference in the economy?

Q: That is correct.

A: I think in your question you mentioned two extremes, but in
fact, there are many shades in this matter. As for me
personally, I wouldn't call myself a liberal. In any case, I shudder
when they call me a liberal. On the other hand, I do not believe
that active state interference in the economy is good. One has to
distinguish the spheres in which there can be no competition and
those where state participation is a must. But where a market is
possible, it should exist. And when the state becomes involved in
competitive sectors of the economy that is indisputably bad. I do
not know of any instances when state participation in such sectors
has been in any way beneficial. Besides, any state decision in the
field of economic policy should be viewed in terms of its long-term
and short-term effects. I do not rule out that state investments may
be effective in the short term, but never in the long term. That is
why, replying to your question, I will say that in terms of my
economic views I am somewhere in-between the liberals and
interventionists.

Q: You would agree, wouldn't you, that it is a very vague
distinction? How to prevent state interference in distributing the
Investment Fund money in a competitive environment?

A: When the Investment Fund was being created, we tried to
clearly determine the criteria for selecting projects. First of all,
the private investor taking part in the project must convince us
that he cannot implement it without state participation. It is only
if we find his explanations convincing that we begin considering the
proposal. There are only two cases when the investor cannot cope
without state assistance. The first is when infrastructure
facilities have to be built which are then to become property of the
state. The second is when the project is not effective enough
without state participation, which makes it unattractive for private
investors. For example, we are interested in creating a new
enterprise for strategic reasons, not so much for the sake of
profits, as for creating new jobs and ensuring economic growth in a
concrete region. But the enterprise cannot exist without
infrastructure facilities, many of which under our laws can only be
built by the state. At the same time the government bodies or
natural monopolies may not be interested in such an enterprise
appearing simply because there is no immediate gain for them from
it. It was then that the Investment Fund should step in. The second
case is a bit complicated. Let me illustrate. For example, the
price of borrowed capital for a private investor is 8-10 percent and
its own capital, 12-15 percent while the project has an internal
profit margin of 8-10 percent. Theoretically, business wouldn't
undertake such a project. By adding a little government money we can
lower the total value of capital and thus make the project
attractive.

Q: So, the state first forbids taxpayers to engage in certain
types of economic activities -- I mean the Law on Natural Monopolies
-- and then it takes tax money to build infrastructure.

A: Yes, we do have a Law on Natural Monopolies. Keeping them as
state property is not a question of economics but of state security.
I mean reliable supplies of power, gas and heating. A natural
monopoly is subject to tariff regulation by the state, and the
regulator then himself chooses either an economically valid tariff
or subsidies to industry and the households. So, I see no
contradictions there.

Q: Let us pass on from theory to practice. Were you, by any
chance, born in St. Petersburg?

A: I see what you are driving at. We recently suggested that a
government commission invest part of the Fund in the construction of
two highways. I mean building a Moscow-St. Petersburg highway on the
stretch from the 15th to 58th kilometer and the building of a toll
tunnel under the Neva River. The answer to your question is, no, I
do not come from St. Pete. And I assure you, we have not chosen
these projects because they are connected with St. Petersburg. And
certainly not because I live in Moscow. These two projects best suit
the criteria I have mentioned. They generate a serious
multiplication effect, they stimulate economic growth and make it
possible to partially solve the transportation problems of the
regions.

Q: And what guided the commission when it decided to direct 14
billion rubles into the construction of the petrochemical complex in
Nizhnekamsk?

A: We are pursing three very important tasks. First, we are
increasing the processing of Russian raw materials and passing on
from the export of oil to the export of petroleum products which are
much less dependent on the fluctuation of world prices. One of the
tasks of the Investment Fund is diversification of the Russian
economy to make it less dependent on world prices for liquid
hydrocarbons. Secondly, we are reducing the content of high-sulfur
oil in our export. As a result, the price of Russian oil should
grow, which will generate profits for the budget and the
companies. Finally, we are giving an impetus to the development of a
large number of small and medium enterprises operating further
downstream. And in doing so, we are not interfering in the
competitive sector. The state will take part only in the creation of
engineering infrastructure. We will recommend the government to
consider an issue of building a section of a railway and the oil
pipeline.

Q: I know that the initiators of these projects have asked you
for money than you gave them. Why?

A: We had a bit of an argument with them over effectiveness, we
counted again and identified some reserves that had not been
factored in. You see, when the calculations were made the price of
oil in the world markets was lower than it is today. So, it is not
surprising. By the way, investors offered the state a share in this
petrochemical complex. We thought it was unnecessary and our partner
agreed with that point of view.

Q: On the one hand, the state has created an Investment Fund.
On the other, it has announced its intention to limit access for
investors to individual sectors declared to be strategic. Is it
to do with politics or economics?

A: I see no politics there. But the problem of national
security certainly comes into it. But this is the practice of all
countries, both developed and developing. We are not inventing
anything new. There are sectors in the economy in which
participation of foreign capital and control by foreigners, is, to
put it mildly, frowned upon because it is connected with certain
aspects of national security. The state should create transparent
rules of the game and clearly determine what can be done and what
cannot be done, who can work in these sectors and who is debarred
from them. The government has already prepared a corresponding bill
and it will shortly be introduced at the State Duma. The sectors are
named there. They are production of strategic missiles, certain
biological substances, nuclear technologies, etc.

Q: These are the sectors where foreigners will be forbidden to
work. By the way, will they be closed only to foreign investors?

A: No, there are sectors which will be entirely financed by the
state. I see nothing wrong with that.

Q: In what sectors will foreign participation be limited?

A: That is the so-called second list. To take part in second-
list sectors foreign companies will have to obtain a permit from an
authorized agency. It is still being debated how big foreign
participation can be in the capital of such enterprises. There are
two options: no than 30 percent or no than 50 percent. So,
if I am a foreigner, and I buy less than 30 or 50 percent of the
shares in an enterprise, I don't have to get a permit. If I buy
, I have to clear my purchase with an authorized agency. We have
identified 39 such sectors. They all belong to the sphere where I
haven't yet met any foreign investors, with the exception of two
areas: natural monopolies, including power transmission and air
navigation and airport infrastructure.

Q: Can you give a couple of examples from the second list?

A: Yes. The production of ammunition, of instruments actively
used in the defense industry. All the restrictions are in one way or
another connected with the defense industry.

Q: Do you think that the industry in this country will become
less or attractive as a result of these restrictions?

A: Of course it will become attractive. The worst thing
for the investor is when he doesn't understand something. This is my
personal point of view. For our economy to become attractive
for foreign investors the rules of the game in it must be as clear
as possible. This is what our bill seeks to do.

Q: Surely the bill was hotly debated when it was prepared. And
surely some of the things that other agencies demanded from you have
not been included. Could you divulge a secret in precisely what
sectors you were urged not to allow foreign investors?

A: Yes, it was a serious debate. It involved not only the
Ministry of Industry and Energy, but also the Defense Ministry, the
Federal Security Service and the Interior Ministry. It is not an
easy law and we wouldn't have delivered it without a serious
conceptual discussion. But I wouldn't reveal at this point what
other sectors we were urged to close to foreigners so as not to
provoke unnecessary emotions and to rule out any intrigues.

(Interviewed by Konstantin Ugodnikov)

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