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Toni Schönfelder
A lifetime of innovation

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Toni Schönfelder
A lifetime of innovation

RUSSIA: $10 billion per year foreign direct investment lost due to non-transparency says PwC A lack of clear, accurate and widely accepted business practices is costing Russia $10 billion a year in direct foreign investment, according to a new study. The study, conducted by consulting giant PricewaterhouseCoopers and advised by former U.S. president Jimmy Carter, was designed to illuminate the financial advantages countries can reap by pursuing greater economic transparency. "Non-transparency is an additional tax for investors," PwC partner Alexander Bolshakov said at the presentation of the study Tuesday. PwC examined 30 emerging-market countries and compared them to its four opacity "benchmarks" - Singapore, Chile, the United States and the United Kingdom - which experienced no "deterred foreign direct investment" for lack of clarity last year. Russia scored the worst in two categories: the overall opacity ranking and the percentage of annual foreign direct investment lost due to its lack of economic transparency - 263 percent of actual FDI, or $9.8 billion. The 30 countries lost a total of $131 billion in FDI last year as investors diverted their capital to more transparent economies, PwC estimated. PwC based its foreign direct investment estimates on International Monetary Fund data for the countries´ balance of payments over the last three years. Last year Russia received $2.7 billion in FDI, 20 percent less than in 1999, according to the IMF. "For attracting foreign investors many countries are reducing their tax load, but increasing transparency is much more effective for attracting investors," Bolshakov said. The opacity index consists of five equally weighted sub-indices in five areas, including corruption, laws governing contracts or property rights, economic policies, accounting standards and business regulations. Bolshakov said Russia is improving in these areas, but at varying speeds. "You have to be a big optimist to hope that something can be changed with the problem of corruption," he said. But in the field of legislation, Russia is doing much better. "The economy is getting more predictable, and by 2004 all Russian companies will use [generally Accepted Accounting Practices] ... let´s be optimists," he said. Investment bank Troika Dialog, simultaneously with PwC, has been researching the equity market and came up with similar results - namely that it, too, is under-invested. The market capitalization of publicly traded Russian companies is 50 percent less than it should be due to poor corporate governance, said chief Troika researcher Christopher Weafer. "The practice and perception of bad corporate governance among Russian companies greatly adds to the volatility of the equity market, and this in turn increases the risk associated with investing in Russia," said Weafer. The current capitalization of Russian equities is approximately $50 billion. Weafer said that the capitalization of Russian equities in a stable, "ripe" market would be upwards of $250 billion. Of the $50 billion between current and target valuation, $34.7 billion is accounted for by an aggregate of Gazprom, UES, Norilsk Nickel and LUKoil. All four companies are now at the forefront of corporate governance concerns, according to the survey St. Petersberg Times, April 27,2001

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