Saturday, 18 June 2016 20:19


Kathrin Hille, Jack Farchy, Max Seddon, The Financial Times, 17.06.2016

It is just what Russians wanted to hear. “We need Europe and Russia to become wonderful neighbours again,” Matteo Renzi, the Italian prime minister told a hall packed with business executives and government officials in St Petersburg on Friday.

Mr Renzi’s speech was infused with eloquent praise for Russian culture. Together with humorous exchanges onstage with President Vladimir Putin and the mere presence of other senior European figures, it lit up the mood at the St Petersburg International Economic Forum, Russia’s Davos-like business conference.

Many international investors, Russian executives and government officials are more optimistic that any time since western sanctions plunged Russia into isolation and economic crisis two years ago.

“The forum is full of expectation. The expectation that the situation will be getting warmer,” said Andrei Guriev, chief executive of fertiliser producer Phosagro.

Russia’s economy contracted by 3.7 per cent in 2015, and GDP growth is forecast to be flat at best this year. Economists say western sanctions and the poisoning of Russia’s relationship with Europe and the US were only minor factors in a slump largely caused by the steep drop in oil prices and long-running structural problems. But much of the expectation of a turnround hinges on hopes that Russia and the EU can patch things up.

Mr Putin hailed Mr Renzi’s presence as a sign that the two sides were beginning to bridge their differences. “The fact that the prime minister of Italy is in Russia today shows that we have a common desire to analyse our difficulties and to overcome them and move on.”

Vladimir Yakunin, former chief executive of state company Russian Railways and a conservative member of Mr Putin’s inner circle, even called on his compatriots to drop the schadenfreude over the EU’s multiple problems, including the possibility of Britain leaving the bloc.

“If something goes wrong in Europe, it is not in Russia’s favour,” he said.

European business leaders were also pressing for political détente. Stefan Schaible, deputy chief executive of consultancy Roland Berger, called for a modern-day Ostpolitik. “The business community is ready; politics has to go by a ‘change through rapprochement’ in high-speed mode. I hope my country will take a central role.”

Russian executives — and their foreign partners — are pinning their hopes on the lifting of sanctions, which have largely locked Russian companies out of western capital markets.

Kirill Dmitriev, chief executive of the $10bn state-run Russia Direct Investment Fund, said that he expected the EU and US sanctions to expire by the end of 2016. “It was just unrealistic to think that Russia would have been broken by sanctions, because it just wasn’t. Russia is an important player, it really cannot and should not be isolated, it has a certain point of view that needs to be understood,” he said.

Mr Putin certainly appeared assuaged by the show of understanding from Renzi and Jean-Claude Juncker, European Commission president who was also present. The Russian president dropped his customary bitterness when discussing European sanctions on Russia, and instead blamed the US for forcing them on to the EU. “Matteo, why? Why are you enduring this?” he joked.

But repairing Russia’s ties with Europe and reinvigorating its economy will take a lot more than pleasantries.

Mr Renzi, like Mr Juncker, made clear sanctions could only be lifted after full implementation of the Minsk peace agreement which aims to end the conflict in eastern Ukraine. His only concession was that he also blamed Kiev for the failure to make progress.

“I’m not very optimistic. It’s still going to be difficult to get EU sanctions lifted, and even if that happens, what will it change?” said a senior executive of a large French company.

“What really matters are US sanctions, and there is no sign that those are going anywhere.”

There is also the big question of whether Mr Putin will seriously fight corruption, enforce rule of law and protect private property rights. The recent appointment of Alexei Kudrin, former finance minister, to two more prominent advisory positions and his mandate to work out a plan for structural reforms was taken as a good sign.

But Mr Putin failed to go much further. He said a new advisory council to the president on strategic issues would be headed by prime minister Dmitry Medvedev, who is often ridiculed for his lack of efficiency and seen as Mr Kudrin’s fiercest rival.

James Friel, global head of investment banking at Renaissance Capital, said he was cautiously optimistic that foreign investor interest in Russia was picking up, but added that it would take “substantive steps of economic reform, combined with stronger oil prices and continued rouble stability” to make a real change.

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