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Jackson and Vanik won’t do us any good

Vice President Joseph Biden’s recent visit to Russia focused on “a business reset”, which Washington plans to launch after successfully “resetting” political relations between the US and Russia. Rossiyskaya Gazeta asked President of the US-Russia Business Council, Edward Verona, who had accompanied Vice President Joe Biden in his recent visit to Russia, to comment on the prospects of the “reset”.   

Rossiyskaya Gazeta:What does the US business community see as some of the main results of Joseph Biden’s visit to Russia?

Edward Verona: The main idea that was explicitly stated: the policy of the current US administration is to do everything possible to accelerate Russia’s accession to the World Trade Organization. Also, in Moscow, Vice President Joe Biden had made an important official statement, that he will personally lead the White House initiative to exclude Russia from the Jackson-Vanik amendment and work on promoting the issue on the Capitol Hill. 

Moreover, there is also significance to certain things, which business representatives do not like to discuss, but which are very important nonetheless. In course of the US vice president’s visit the need to fight corruption and reduce administrative barriers to investments were also addressed.  

RG:The US vice president said that he did not consider it to be normal for Russia to hold only the 27th place on the list of America’s major trade partners. Washington had clearly stated that it intends to “reset” the economic relations with Russia. What are the chances this initiative will succeed?

Verona: This largely depends on the efforts, put into ensuring Russia becomes a WTO member. Already three of the recent US administrations have promised to lift the Jackson-Vanik amendment, and this time, I hope the White House could keep its promise. This is truly the weightiest part in the “reset” of our economic relations.  

I believe that as soon as Russia joins the WTO, it will become a much more attractive place for investing. Then, I expect to see a considerable rise in direct foreign investment into Russia in the medium and long-term. 

RG:When we are talking about the Jackson-Vanik amendment and the US administration’s desire to lift the amendment in relation to Russia, many experts in Washington say that, considering the strengthened positions of the Republicans on the Capitol Hill, doing this will be practically impossible. What would you say to that?

Verona: Here, indeed, a lot depends on how much effort the Obama administration will want to put into this initiative. But I would like to note that many of the Republican leaders in the Congress believe that the Jackson-Vanik amendment’s action in relation to Russia does not bring any benefits to the US, and the only thing it is capable of doing is simply depriving the American companies of the advantages, which they could enjoy by doing business with Russia – a WTO member. If after Russia’s accession to the WTO, this amendment continues to be in effect, the US will be forced to issue a special statement to the WTO, explaining that it cannot maintain normal trade relations with Russia as a result of the continued action of the given amendment. Russia, in turn, has the right to do the same – and as a result, we will find ourselves stuck in a deadlock and deprived of all the benefits, which the two countries could have received as a result of 17 years of tough negotiations. This, of course, does not make any sense.    

RG:What sectors of the Russian economy, in your opinion, could be most attractive to foreign investors after Russia’s accession to the WTO? The oil and gas sector? 

Verona: In reality, oil and gas, on their own, do not have much in common with the WTO. I would cite two other examples: pharmaceuticals and microelectronics. These types of products are usually produced by large enterprises, and are not so much focused on the domestic consumption as they are on exports. And according to the conclusions of the talks on Russia’s accession to the WTO, which took place in Geneva, particularly in terms of discussion of the pharmaceutical and microelectronic manufacturer’s rights, as well as government requirements for localization of these products, I would expect to see an increased interest in Russia from these companies. 

RG:As far as I understand, the “economic reset” – is a two-way street. After all, we are not only talking about ways to create acceptable conditions for US companies in Russia, but also about ways to ensure the interest of Russian business structures in the United States. Was this issue raised in course of Vice President Joseph Biden’s discussions with business representatives of the two states in Moscow?

Verona: Unfortunately, this topic had not been discussed, although I know at least one Russian company that would like to have this addressed. The way the issue is formulated is correct; there are Russian companies that have concerns about the US, they have their own problems. I won’t name specific company names and limit myself to mentioning the sector in which some of them operate – the steel industry.

Some of the Russian investors into the US steel sector are concerned about the possible introduction of special requests sand restrictions for steel acquisition to US companies, linked to military-industrial production. The US Congress is making attempts to adopt such legislation, which obliges defense producers to purchase only US-made steel. This, to put it mildly, is not in line with our principles of free trade and poses a real problem for a number of large Russian companies.     

Another example involves Russia’s oil and gas companies, which are interested in investing into oil and gas in the United States, particularly, production of shale gas. Will this require an approval of transactions by the US Foreign Affairs Committee, which is subordinate to the US Treasury? Yes, perhaps. Although this office has not once refused Russian companies. 

RG: Speaking of prospects, what level could the volume of the US and Russian mutual investments realistically reach in the foreseeable future. 

Verona: Since 2003, the average volume of Russian investments into the US has been at $8 billion. Thus, we are talking about approximately $1 billion annually over seven years. And it is quite an impressive amount, especially considering the fact that the Russian companies are not yet investing much outside of Russia and the CIS.

In reality, outside of the CIS, the US has been the country in which the Russian structures have made the most direct investments, which mainly relates to the earlier-mentioned steel industry. I would say that the Russian companies’ investment volume into the US is significant and this is an inspiring trend. 

Thus, if economic growth resumes, if the demand for steel products rises, and the Russian companies, above all else, start investing funds into the US oil and gas sector I, very distinctively, see the figure of $1 billion in Russia’s annual direct investments into the US. 

As for the US investments in Russia, the figures differ. Even without counting the PepsiCo’s recent purchase of Wimm-Bill-Dann, the total amount of the US direct investments into the Russian economy is, today, at about $20 billion. And if we look at the comparative statistics, that’s, relatively, not a large sum. By 2008, for example, US direct investments into Russia amounted to $17 billion, into India – $18 billion, Brazil – $45.5 billion, and $100 billion into China.    

As for the forecasts, even if we look at individual sectors, the outlook of potential US investments into Russia is quite optimistic.

Today, we have an agreement with Chevron and Exxon to conduct exploratory and production works with Rosneft, and if the partnership continues – this will require enormous primary investments of dozens of billions of dollars. Thus, in the oil and gas production field, Russia has colossal potential for foreign investments, and two of the US companies have a good chance to participate.   

PepsiCo’s total investments into our country, considering its purchase of the controlling stake in Russia’s Wimm-Bill-Dann, comes close to $6 billion. And that’s just one economic sector!  

In addition to that, I will mention the agreement between Ford and Russia’s Sollers, which are establishing a joint enterprise for the production of a sufficient number of vehicles, which meets the localization requirements of the Russian government. This, too, will require substantial investments.

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