Russia, in need of ‘investment boom,’ to scrap capital gains tax on foreign direct investment

Russia to scrap gains tax for foreign investors

ST. PETERSBURG, Russia — Russia will loosen the state’s controls on the economy and abolish a key tax to spark a desperately needed “investment boom,” President Dmitry Medvedev told a gathering of foreign business officials Friday.

Medvedev invited more competition and vowed less state intervention in the economy, particularly by drastically reducing the number of state-controlled enterprises.

The moves are designed to attract massive foreign investment, without which Russia’s oil-and-gas dependent economy — which shrank by nearly 8 percent last year — is doomed to stagnate, the Russian president said.

“Russia needs a real investment boom,” Medvedev said. “Creating suitable conditions for investors is, in effect, our most important goal. Today we are putting this goal at the center of our activities.”

To this end, Medvedev said that starting next year Russia will scrap the capital gains tax on long-term direct investment — an announcement his audience applauded.

But the 44-year-old president, widely perceived as playing second fiddle to Prime Minister Vladimir Putin, his predecessor as president, stopped short of addressing Russia’s endemic ills such as corruption, red tape and the judicial system, which investors point to as the main obstacles to doing business in Russia.

Medvedev made only brief mention of the draconian methods often used to investigate businesses in Russia, saying police would face greater oversight in how they conduct searches.

In recent years a string of police raids on offices of Western companies have carried political overtones, creating the impression among many investors that not all firms are equal under Russian law.

Still, Medvedev lamented the state’s grip on the economy — one of the legacies of Putin’s eight-year presidency — and even resorted to vivid imagery to drive home his point.

“People often think that the person who picks apples does the main job, but in fact it is the one who plants the apple tree whose job is crucial,” he said.

“The state should not always pick the apples on its own. In a free economy there will always be people who will do it better and faster,” Medvedev said.

Kingsmill Bond, chief strategist of Troika Dialog, an investment bank, said Medvedev’s speech would have been impossible two years ago.

“The government has a very different rhetoric from several years ago,” he said. “One should take what the president was saying at the face value and recognize that the environment is not going to get worse but is probably getting better. And it could get better quite radically.”

Bond noted that Medvedev glossed over graft and bureaucracy — two serious obstacles to doing business in Russia.

“More important is to establish an environment where people can operate under the rule of law. That’s the government’s main function,” he said. “I’m surprised the president did not talk much about that.”

There are currently more than 200 strategic enterprises — or companies off-limits to foreign investors — and Medvedev’s decision to reduce their number fivefold was saluted.

“The crucial thing that was announced is a cut in the number of strategic enterprises, which means that the state is going to gradually give up the direct participation in the economy,” said German Gref, CEO of state-controlled Sberbank, Russia’s largest lender, and once a top economic adviser to Putin.

Medvedev hopes to use innovation and high-technology to diversify Russia’s economy and prepare it for future generations.

During his speech, he waxed lyrical about Russia as a future land of opportunity, “where people from around the world will flock in search of their particular dream.”

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Associated Press Writer Irina Titova contributed to this report.