Trade with the Former Soviet Union

HL Deb 06 April 1998 vol 588 cc583-608

7.46 p.m.

Lord Ponsonby of Shulbrede

rose to ask Her Majesty's Government what steps they are taking to improve trade relationships between the United Kingdom and the countries of the former Soviet Union.

The noble Lord said: My Lords, I should like to begin by thanking all noble Lords who have decided to speak in this debate. I believe that it is an important debate and I am glad that, on such a specialised subject, so many noble Lord have thought fit to take part in the debate.

My purpose in tabling this Unstarred Question is to remind the Government of Britain's relative failure to take advantage of the commercial opportunities in the countries of the former Soviet Union and in particular, in Russia and to ask the Government what they are going to do about it.

On 18th February, thanks to the efforts of my noble friend Lady Smith of Gilmorehill, a parliamentary link seminar was held in the FCO to discuss our trade relationships with Russia. The figures with which we were presented were not very encouraging and, for the benefit of noble Lords who were not present, I shall repeat some of the main conclusions of the briefing which we received.

The UK is only the sixth largest OECD supplier to Russia behind Germany, France, the USA, Italy and Japan. The UK has a market share of only 5.2 per cent. Exports in 1996 exceeded £1 billion, which was an increase of 16 per cent. over 1995. The figures for 1997 show a 22 per cent. increase over 1996 and an improved trade deficit over 1996.

Therefore, the picture is improving, in that the Russian market is expanding and British trade is part of that general expansion process. But Britain is still dramatically under-performing in comparison with its main competitor countries within the OECD. I hope that that provides a framework for the figures which we are talking about.

Anyone who has had any involvement with Russia, or with the former Soviet Union, will know three fundamental truths about working there. The first truth is that there is enormous potential to Russia. It has massive and unrivalled mineral wealth, especially in oil and gas, and it has a highly educated workforce. That is a formidable combination of assets and it sustains many foreign companies which operate in Russia and which constantly come across the second fundamental truth; namely, the huge problems involved in operating in the former Soviet Union.

There are still breathtaking bureaucratic procedures: there is a legal framework which is in its infancy and there are constant changes to the fiscal regime, which all adds up to a constant undermining of companies trying to operate on any sort of long-term basis. Many of the bureaucratic procedures arise out of a different perception of the role of a company itself. Under the old Communist model, companies accepted huge social responsibilities—such as housing, medical provision and schooling—and often managers spent all their working day dealing with these social responsibilities rather than addressing the problems of the company. Western managers, by contrast, believe that they pay taxes to address those issues and that, if the taxes are inadequate or uncollected, it is the government's problem.

When I was a manager in a Western joint venture operating in Russia, we found that our Russian managers were very reluctant to accept our instructions. Our instructions were always the same; namely, to reduce costs and increase production. However, our Russian managers believed that we were out of touch with the wider social consequences of our advice. It is ironic that it is this heightened sense of social responsibility which has led to many of the massive inefficiencies in Russian industry today. The situation is changing, but it seems to be the companies which are starting from scratch, rather than those which are trying to change from within, which are most effective at operating in anything approaching a commercial manner in the former Soviet Union.

The third fundamental truth that I wish to outline is one that I should like to dwell upon a little further. I have in mind long-term relationships at every level—that is governmental, institutional, corporate and personal—which are the keys to building success in the former Soviet Union. That is true in every country that I ever worked in, but it seems to be particularly true in Russia.

The point that I wish to make in tonight's debate is that some governments, particularly those of Germany and the United States, seem to understand that it is necessary to build multifaceted long-term relationships if they are to reap the benefits in the long term. They are building those relationships now and in a systematic manner which far exceeds anything which the previous government even aspired to achieving.

I shall give your Lordships some examples. In Germany, which of course is the most successful exporter to Russia, they have a large number of institutional relationships from government level to Lander (or regional level) to town level. They take on this multifaceted approach which is on a different scale to anything we have done. All that is underpinned by a huge amount of bilateral aid—100 billion US dollars between 1996 and 1998, which represents 25 per cent. of all bilateral aid payments by OECD countries. By contrast, Britain gives 1.5 per cent. of the total bilateral aid. Last week I spoke to an official at the German embassy who was at pains to point out that Germany's large-scale investment in Russia, both institutionally and corporately, was a calculated risk promoted by the German Government a number of years ago and that they do not expect to see the true benefits of that investment for a number of years to come.

My other example is the United States, which, too, has taken a long-term strategic view at a number of different levels. I shall now mention some of the US Government agency programmes which support trade with Russia. The US Ex-Im Bank is an independent agency of the US Government created to support US exports in foreign markets. In 1993, a framework agreement was signed with the Russian Ministry of Fuel and Energy and the Ministry of Finance which amounted to 2 billion dollars. That is a lending programme to refurbish existing Russian oil and gas facilities using American equipment. Another example is OPIC, the Overseas Private Investment Corporation, which gave 4 billion dollars in 1997 in loan guarantees to attract further American investment into the Russian economy. Indeed, the list goes on; for example, there is the US Trade and Development Agency; the US Agency for International Development; the US Department of Agriculture; the Foreign Assistance Program, and so on. All those agencies have mature links with their Russian counterparts and they are all working to enhance US trade links with Russia and the former Soviet Union.

I should particularly like to mention the Gore-Chernomyrdin Commission—which may, although I am not sure, have now been renamed—where American business leaders work at the heart of Russian government in an attempt to shape the commercial climate, especially in the field of energy policy. No other government even approaches that level of influence. The large US oil corporations will expect to benefit through this American initiative.

It is no accident that the American oil corporations are in pole position for gaining access to some of the largest oilfields in the world and it is no accident that they will do this with some form of state guarantee. It is the US Government's systematic approach to building links with Russia which the US corporations will take advantage of.

I wish to close by telling your Lordships a story about when I was a student at Imperial College, London in the early 1980s. We asked a senior BP executive to address us as we all hoped to work in the oil industry; and, I suppose, we all hoped that he would give us a job. One of the questions he was asked was, "What is the most significant development you have seen in the 40 years you have worked in the oil industry?" His answer was: "The move to the offshore oil industry". He said that in the early 1980s. I believe that the opening of the former Soviet Union is a development of similar magnitude for the international oil industry today. I know that some British oil companies have recognised this opportunity, but I do question whether the Government have quite understood its full impact.

I have not attempted to be fair in this speech. I have not attempted to compare Britain's performance with that of France or Italy, where there would still be an unfavourable comparison but where the differences would be less extreme. However, what I have tried to do is to demonstrate that some governments—namely, those of Germany and the United States—are taking a strategic and long-term view which is on a completely different scale to anything which, certainly, the previous government even aspired to. I ask my noble friend the Minister whether he accepts that, unless we significantly raise our game, more and more business will go to the countries which are currently taking this strategic and long-term view. Does my noble friend recognise that point and what does he propose to do about it?

7.58 p.m.

Viscount Torrington

My Lords, I am sure that other noble Lords will echo my thanks to the noble Lord, Lord Ponsonby, for introducing tonight's debate. For those of us who follow events in Russia, we live, like those subject to the famous Chinese curse, in interesting times. I spent three days in Moscow in the week when President Yeltsin fired his entire government. The most interesting aspect of the whole affair to me was that hardly anyone seemed very fussed about it. Indeed, 10 years ago such an apparent earthquake in the governance of Russia—then, I believe, still the Soviet Union—would have been an earth-shattering affair. Today the good burghers of Moscow are too busy getting on with living and sampling the delights and interests of imported capitalism.

Of course not everyone shares those benefits. Moscow, Nishny Novgorod, perhaps St. Petersburg and one or two other small centres, such as some of the oil towns with +particular resources or industrial raison d'être, are reaping such benefits, mainly as a result of good, enlightened or at least efficient local government. One thinks of Mayor Lushkov of Moscow in this context. It is nevertheless hard to judge whether the beggars have disappeared from the streets of Moscow because they no longer need to beg or because the efficient Mayor Lushkov has had them quietly pushed out of sight.

I do not want to detain your Lordships long tonight, and probably I shall detain you for less time than I am permitted. I have just a simple message which the noble Lord, Lord Ponsonby, has already touched on. Russia has made enormous progress since the fall of the Soviet Union, but it still has a long way to go before international business will feel entirely happy within its borders. Its business law is still underdeveloped, capricious, often illogical, confusing and restrictive. For example, the formation of a simple closed company requires automatic registration with a myriad of different authorities, from the federal tax offices, through VAT, pension administrators, local authorities and so on. Even before it starts to do any real business it is necessary that the company has at least one full-time employee just to cope with the filing required by the bureaucracy.

When it comes to setting yourself up to do business, beware, for example, of lending money to your Russian affiliate. At present, any loan repayments made directly to a foreign entity are subject to VAT, which makes lending prohibitive. In any case do not think of investing directly. You must first assist the economy of Cyprus by forming a Cypriot company through which to route your investment in order to take account of the Russian Cypriot double taxation agreement.

When it comes to oil or minerals—here, I suspect like the noble Lord, Lord Ponsonby, I plead a small interest in the subject of this debate—the Government have passed legislation permitting Russian and foreign companies to share the ownership of oil and mineral rights (the so-called production sharing law); but the Duma has insisted on the right to approve each individual transaction in this sphere, thus making the law almost impossible to operate. Without it—and as there is a legal debate as to whether subsurface rights can be conveyed to a third party at all by an original licensee—many projects either have a somewhat shaky legal foundation or are on hold.

I was told on a recent visit that the purpose of the dramatic dismissal of the former government was to put in place an entirely fresh team, who would restart the somewhat stalled process of reform and who would formulate a package of measures to be promulgated some time between June and the end of the year which would do away with the kind of restrictions on the efficient workings of trade and industry which I have just described. Indeed I am assured that full freehold ownership and many other established western concepts and practices will be ushered in some time in the second half of this year. I do not know the present basis of Russian business and commercial law, whether it is a simple adaptation from Soviet law to allow for the formation of companies and so on, or whether it is a return to pre-1917 practice, or what. However, the little I have seen of it seems horrifically burdensome.

This country has given to the rest of the world a simple and clear system of business law and practice and commercial law, so may I hope and pray that Her Majesty's Government will do all in their power—especially given their new reforming zeal and less than wholehearted adherence to outdated socialist principles—to encourage the Russian Government first to bring down the barriers to open trade, commerce and investment. Secondly, I hope they will persuade the Russian Government that where their law is deficient they should perhaps look to British rather than certain continental models, perhaps with the help of the know-how fund. Thirdly, I hope they will help British companies which have—albeit with a disproportionate investment in Russia—played a pioneering role. I hope that our Government will encourage them to become settlers in the new Russia.

8.3 p.m.

The Earl of Carlisle

My Lords, it is a pleasure to follow the noble Viscount, Lord Torrington, who has vast experience of business life and who has given great service in your Lordships' House on the European Communities Committee. He says that Russia must, of course, lower its barriers to enable us to engage in more trade with it. However, we have erected certain barriers as regards trade with the Baltic states. I shall return to that point later.

I thank the noble Lord, Lord Ponsonby, for this Unstarred Question. He asks what steps have been taken by Her Majesty's Government as regards these trade relationships we are discussing. I can tell him that since 1991 there have been far too few steps taken in that regard. However, the noble Lord also asked what steps Her Majesty's Government will take. He refers in his Question to the countries of the former Soviet Union. I remind your Lordships that the 10 nations, the independent, sovereign states of central and eastern Europe, do not like being referred to as former Soviet Union countries. As we know, they were annexed in 1940, and subsequently re-occupied in 1944. I do not think that the Republic of Ireland would like to be addressed—at the moment or at any time since 1922—as a former part of the United Kingdom. The former countries of the Soviet Union are naturally sensitive on this point. They prefer to be called central European independent states.

I am not a businessman but, as I have told your Lordships before, I have lived in the northern Baltic state of Estonia for the past three years. I have travelled extensively around central Europe. I have often met businessmen and have occasionally met a representative of the Foreign Office. I have asked the businessmen I have met, whether they have visited the British Embassy and whether they know the Ambassador. They have told me that they have not done so because the embassy staff are overworked and understaffed. They tell me that they do most of the work themselves as the embassy staff are not much use to them. That has saddened me. I know that since the present Government have come into office the situation has changed and that we are bolstering our embassies in central and eastern Europe with the addition of economic counsellors. But that is too little and too late. As a result, our business adversaries in western Europe and the United States are several steps ahead of us.

I shall give a few statistics. In 1992 our exports to Estonia were £8 million; five years later they are £63 million. In 1992 exports to Latvia were £15 million; in 1997 they were £86 million. In 1992 exports to Lithuania were £13 million; in 1997 they were £106 million. I resist making comparisons but we lag far behind our competitors in this regard. What steps should we take? First, businessmen do not invest unless there is security of investment. I understand that we have good relations—thanks to the Secretary of State for Foreign Affairs—with the Russian Federation. Let us use them to enhance the security of the Baltic states and the central European nations. Let us hasten to bring those "five plus one" into the European Union before the year 2004. Let us reform the CAP and accept dairy products, especially from the Baltic states, and break down the barriers that exist. They cannot buy goods from us unless they can sell goods to us. Let us also help their border guards to confront the mafia.

Let us try to target countries with whom we have excellent relations, for example, Poland, the Czech Republic and the Baltic states. I have asked what steps we should take, but what steps must we take? Between Warsaw and Tallinn is the Via Baltica. I have travelled up and down it in a car, a bus and in a bumpy old Landrover. It needs extending and widening if we are to trade overland. Let us initiate that during our presidency of the European Union. A third bridge needs to be built over the River Narva, as the Foreign Secretary of Estonia, Mr. Toomas Hendrik lives, told the European Union in Brussels when he arrived to sign the accession treaty in February.

Let us consider widening the railway between Tallinn and St. Petersburg where most goods travel overland between the Russian Federation and the Baltic Sea. Let us consider establishing a trade mission in Warsaw, Tallinn or Riga. We have similar trade missions in Milan and Düsseldorf. Let us have one in central and eastern Europe. I conclude on the following point. During our European Union presidency we have done one thing in Estonia—we have painted a tram with the colours of the flags of the European Union, of the United Kingdom and of Estonia. One tram painted, my Lords! I do not know how many man-hours that has taken the Foreign Office and the British Embassy. I do not know how many files have passed to and fro. But it is a little sad. Trade or aid; trade and aid; we need to do both. I look forward to hearing the Minister's answers to some of these proposals.

8.9 p.m.

Lord St. John of Bletso

My Lords, as is customary in your Lordships' House, I start by thanking the noble Lord, Lord Ponsonby, for having introduced this timely and topical debate. I note from the list of speakers that many noble Lords are speaking either from experience of having lived in several of the countries of the former Soviet Union, or having undertaken regular business there, as has the noble Viscount, Lord Torrington. I speak from the experience of being a consultant to Merrill Lynch, which has been setting up offices in several of the countries of the former Soviet Union. I have paid several visits to Russia over the past four years and have received in London several delegations from Azerbaijan, Kazakhstan, Russia and the Ukraine.

It is clear from the statistics which several noble Lords have received—they were sourced from the Library, and come from the MM 20 Business Monitor—that while there has been a substantial increase over the past two years in imports into the United Kingdom from the countries of the former Soviet Union, those figures are not matched by UK exports to those countries. The point has already been made by the noble Lord, Lord Ponsonby.

There are a number of well-publicised reasons for the poor performance. A recent article in the Independent headed "Russia holds pot of gold for those who risk assault course" reported that more than 400 British companies have now decided that the benefits of investing in the new Russia outweigh the risks. Balanced against the concerns of endemic corruption, the generally poor and rundown infrastructure, bureaucracy, the complexity of the different state taxes—a point made by the noble Viscount, Lord Torrington—and legislative chaos, there are in Russia almost 150 million new consumers, added to which are also low labour costs, a highly educated population, and a large economy founded on vast natural resources. By way of example, in the past three years since SmithKline Beecham has been in Russia, its sales have risen by 800 per cent.

Following the Prime Minister's visit to Moscow last year, it was encouraging to note his announcement that a further £500 million would be made available in export credits to Russia, and that the Export Credits Guarantee Department would be expanded to insure Russian investments by United Kingdom companies. Despite this boost, our share of exports into Russia does not match that of the United States, Germany, Italy, Turkey and Scandinavia which have all been capitalising on the huge increases in imports into Russia over the past six months following the move in that country to upgrade its industrial capacity. There is no doubt that, for many British companies, political uncertainties in the region have been a great deterrent.

Following his visit to Russia last year, with a delegation of British businesses, Sir Colin Marshall, the President of the CBI, expressed his three major concerns regarding investment into Russia as being the complexity of Russian taxes, bureaucracy, and crime and corruption. From the experiences of many businesses which have not succeeded in this region, one of the lessons that I believe has been learned is that the most efficient and reliable model for doing business in the countries of the former Soviet Union is through joint ventures and production sharing agreements.

As my allotted six minutes are almost up, I should like to make just one final observation. I believe that if we are to improve trade relations with several countries of the former Soviet Union, we should encourage all efforts towards EU enlargement. There is no doubt that the process of EU expansion has acted as a significant stimulus to economic reform. EU enlargement should stimulate trade between western and central Europe and reduce investment risk. I hope that the Government will play their full part in promoting that process.

8.15 p.m.

Baroness Smith of Gilmorehill

My Lords, first, I congratulate the noble Lord, Lord Ponsonby of Shulbrede, on initiating the debate. I am particularly grateful to my noble friend because it gives me the opportunity to speak about a country which has been a lifelong interest of mine. I first visited the Soviet Union as a student before the Berlin Wall went up and at a time when Stalin still lay beside Lenin in the mausoleum on Red Square.

My first job was with the Great Britain-USSR Association in London, where I worked with Sir Fitzroy Maclean, who was the inspiration behind the work of the association. In those days it was not easy to be a friend of the Russians in the West. One was regarded with suspicion and often labelled a "red under the bed". But the work was exciting and Sir Fitzroy gave us great leadership.

I have learnt one lesson above all. To work successfully with the Russians, one must establish trust and friendship on a personal level and, having earned it, one must never betray it. The friendships gained are like no other, but there is a price. One must take the time to understand Russia's history, culture and traditions.

This is relevant to tonight's debate. There are no short cuts to getting to know one's business colleagues. It takes time and money. But I suggest that it is a necessary part of doing business in Russia, and companies which put resources into this process will be well rewarded.

I believe that now is the time to put fresh energy into our relations with Russia. There was great enthusiasm in the early 1990s when new possibilities opened up under Gorbachev. The noble Baroness, Lady Thatcher, and John Major attached great importance to the relationship. I personally was honoured to be invited by John Major to meet President Yeltsin at Chequers in 1994. I believe that the British Know-how Fund has played a crucial role in helping the integration of Russia into the economic and financial institutions of the West.

The problem now is to sustain relations with a country which is going through a difficult period. The uncertain political situation, an incomplete and sometimes contradictory legal framework continue to cause major problems, and the tax system represents a major disincentive to long-term investment.

For those reasons, Russian and foreign investment in the Russian economy remain worryingly low. In those circumstances, the support of the UK Government is crucial. I was delighted to see in the Export Forum's report Towards an Export Initiative that Russia has been designated a suitable market for a targeted export initiative over the next three years. These are markets which UK exporters are currently under-exploiting but which offer outstanding opportunities. That is the kind of government support we welcome.

Several UK companies are already making major investments, including British Home Stores, Cadbury, Shell, BP and British Gas. I would like to declare an interest as a member of BP's Scottish advisory board and to speak about the company's commitment to the Russian market. In November last year BP made a major strategic commitment to the Russian economy with the acquisition of a 10 per cent. equity in Russia's fourth largest oil company, SIDANCO. In acquiring this stake, BP has signalled its interest in working closely with Russian partners in the development of an internationally competitive Russian oil and gas business. I believe that its example should encourage others to follow.

As a member of the Executive Council of the Russo-British Chamber of Commerce, I should like to mention the excellent work that body does, with the support of the DTI, to promote trade and business contacts between the two countries. Last year I attended a highly successful "Britain in Russia" exhibition in Nizhny Novgorod, in which over 100 British companies took part. This year the chamber will stage two major exhibitions, the first in London in May, "Russia Expo 98", and "Britain in Russia" in Ekaterinburg in October. British companies can derive great benefits from participating in these events. I hope that the Government will continue to support the work of the chamber.

I will return to the theme with which I began. I believe that we must work to enrich the dialogue between our countries. I propose that we establish a regular conference between politicians, business people, journalists and others, an annual gathering on the model of the Konigswinter Conference or the Franco-British Colloque. A Russian equivalent would do a great deal to break down the barriers of ignorance and suspicion. These events allow frank and relaxed discussion on wide-ranging issues and create lasting friendships over a number of years.

When I read last week about the Yeltsin-Kohl-Chirac summit which is being called the Great European Troika, I was struck by President Chirac's words, This is an event the importance of which should not be underestimated. We want to confirm the common vision by our three countries on the future of Europe after Yalta". I asked myself why Britain was not included. Should we not be participating in an event of such importance?

This is a time of uncertainty in Russia but President Yeltsin has promised that there will be no change of direction. A new team in the Kremlin will be anxious to find new friends and I believe now is the time for the UK Government to give a lead and make a renewed effort to give our friendship extra depth. It will be good for business and good for all our citizens.

8.22 p.m.

Lord Cromwell

My Lords, I would like to start by thanking the noble Lord, Lord Ponsonby, for opening this debate with such a stimulating speech. I hope that the Government will take note of what he said.

I regularly do business in the former Soviet Union particularly Russia, and I therefore declare an interest. My generation grew up with a popular image of the then USSR as an undifferentiated and secretive land mass east of Germany waiting to overwhelm us all. How very different the perspective of the next generation will be. The former Soviet Union is now not only a market in its own right for everything, from basic infrastructure to sophisticated consumer goods, but also a rich ground for the development of joint ventures in order to access other markets.

As a regular visitor to the former Soviet Union I have been struck by the respect and even fondness with which Britain is viewed by many, often based on their reading of Conan Doyle rather than direct contact with Britain. Indeed, Britain is still sometimes referred to as "Foggy Albion", which is so much better than "perfidious Albion". While those images may seem quaint to us, they include a belief that British people are basically fair and trustworthy. However, I have too often found that the people that my friends in the former Soviet Union are doing business with are German, French or American but not British. It is usually explained to me that, although the British go over sometimes, they can usually only afford to send one representative for a couple of days and only send him once. He does not appear to have any government backing and will not commit to anything that does not have immediate profit. My hosts contrast this situation with a German or French company which sends up to a dozen people, briefed and supported by external political and financial resources, who stay for weeks and even months, building local relationships and are ready to sign long-term contracts on the spot. I regret that many British businesses are still put off by the prospect of venturing, as they perceive it, alone into unknown territory, even though Moscow is less than a four-hour flight away.

Later in the debate I am sure that we shall hear of the many things that Her Majesty's Government are doing to promote trade with the former Soviet Union countries. I wonder, however, how these activities, although worth while, compare with the support available to some of our competitors.

Former Soviet Union governments are anxious about generic issues of their domestic industries, trade barriers, EU dumping regimes, EU membership and, in addition, gaining membership of multilateral trade organisations. These are clearly important areas in which a responsible but positive British stance will help future trade relations. However, it is also in the active promotion of specific trade opportunities that our Government have a role to play.

The British Foreign Secretary has rightly warned against turning Britain into some kind of nostalgic theme park rather than a 21st century enterprise-based economy. Part of the development of such an economy in Britain must be recognition of the degree of local involvement, the long-term perspective and the political investment needed to succeed in new markets.

In Britain we have a greater separation of private business and state support than some of our competitors, but this can be a severe handicap when faced with competitors whose access to direct state promotional support gives them both confidence and prestige in their dealings with former Soviet Union trading partners.

I would like to mention another area in which I think Britain could do better through more effective linking up of British and Russian and small and medium-size enterprises. In former Soviet Union countries I am constantly approached, no matter how low-key or remote the area of my visit, by representatives of local businesses seeking external partners for their enterprises, which range from steel plants to textiles, from tourist locations to medicines made from reindeer antlers. Some of your Lordships may smile at the last of these, but I have included it exactly because it has since become the basis of a Korean-Russian joint venture.

Hundreds if not thousands of such opportunities exist in the former Soviet Union. If Britain does not find them and take them up, then others will. In Russia alone, the Dutch invested more than double the amount invested by the UK in the first half of 1997. In 1996 the Germans exported more than four and a half times the UK level. Each such opportunity lost is also a loss of ability to develop partnerships and to shape the future trade traditions of the region. The problem for smaller companies is that location and following up such opportunities from scratch and on their own are dauntingly expensive.

Would Her Majesty's Government consider a specific project to benefit Britain and the Former Soviet Union by making such opportunity more accessible to British companies? A user-friendly and accessible computer-based information network linked to full-time local specialist researchers across the region would be one step in this direction. However, I stress again that this initiative would have to be part of a wider strategy of trade promotion and support.

In conclusion I note that the DTI publication, Doing Business in Russia,states that there is "strong competition from other exporting countries" and that "a sustained sales effort" is required. One important way to improve Britain's trading and business capacity in the region must therefore be to promote and foster more than just one-off contacts. What is needed is solid follow up and practical support to establish long-term commercial links between British and former Soviet Union businesses. Government involvement in such activities may go against the grain in this country but without it we will achieve well below our potential commercial capacity in the former Soviet Union.

8.29 p.m.

Lord Brooke of Alverthorpe

My Lords, I too am grateful to my noble friend Lord Ponsonby for this debate. I wish to speak particularly about Russia which is an important new market of 150 million consumers for us. Regrettably, as so many people have said, we are failing, in taking such a small share of the market. We are slow to move. Germany and the US are moving particularly quickly. However, I welcome the Government's decision to focus more attention on trying to develop our exports to Russia.

I believe that Britain has much to offer and to sell, not only in the export of manufactured goods but also in the service industries. Governance and accounting were mentioned earlier. They are major areas in which we can make a contribution. Our public services too have a great reputation, and there is much that in one form or another can be exported, particularly in the education and training fields.

Thousands come to this country to learn English. It is a big earner in the UK, but there are millions abroad who want to learn English or improve it. There is a great demand in Russia too to learn English. I wonder whether we are missing out on major opportunities to develop new markets for exports.

The British Council and the BBC World Service do admirable work. They are respected and have fine reputations. But they are constantly subject to reviews and cuts. What they achieve is done on the basis of a shoestring. For example, the British Council spends only around £4 million per annum in Russia when it is a huge market. It is insufficient to make a serious impact. The Government need to review their approach.

If we are really serious about penetrating markets and building the networks which have been discussed and are badly needed, then more will have to be spent. While in the short term it may not immediately produce returns, in the longer term the investment will be well worthwhile. Equally we must look for new opportunities for raising investment funds for public services. That needs to be explored.

The British Council says that it wants new partnerships. It wants to be innovative, and I believe that it is. However, I have been making inquiries about the kind of partnerships being developed and they are not as innovative as I might have hoped. While there is support from the EU in funding and in creating links with certain UK public educational establishments, there do not appear to be any links built, or in prospect, with the private sector which has major providers of education and training, particularly in English. There are chances there for us to be innovative and to adopt new approaches, using both the British Council and the BBC.

We have a product, our home language, which is in demand worldwide and especially in Russia. Throughout the rest of the world I do not believe we have yet realised the potential that is available to this country to build on that and to make great strides forward.

There is a case to be made—and I shall be interested to hear the Minister's response—for the British Council, the BBC World Service and the private sector which has an interest in education and training in English to come together and perhaps ascertain whether we can mount a seminar of some kind. We could see what possibilities may be open to us and whether we can find new joint ventures for the future, with more money being invested in the area, not solely from the public services but from the private sector too.

Initiatives along those lines would not only be beneficial to us but would also help the Russians foster their integration into world and market economies, to stay out rather than turning in. We must do everything we can to help their economy to recover and to underpin the fragile democracy that we see there. I compliment the work being done through the Know How fund and by the forces. It was good to hear of our forces helping with the retraining of redundant Russian military officers, of whom there are thousands, as we know.

More could be done. With my Inland Revenue background, I believe that there are great possibilities. Some of the redundant officers who are being retrained could perhaps be directed into the public service where their skills, their management experience, their strength and willingness to stand up to difficulties, could be well used, particularly in Russia's equivalent of the Inland Revenue.

The fiscal regime is in a mess. Unless it is helped there are significant dangers for the country and possibly, taking a broader view, for other countries of Europe also if by some chance Russia started to see the collapse of its economy and democratic structures.

We should be concerned at the continuing inflow of foreign money to finance Russian budget deficits while internally there are large shortfalls in revenues. There are inadequate yields coming through in the form of taxation—sufficiently so in 1997 for the IMF temporarily to suspend support. We should be concerned that so many employees in Russia are either not being paid or have substantial wage and salary arrears owing to them. The latest estimate is that 55 billion roubles are owed—the equivalent of 10 billion dollars. Nearly 20 million workers are affected. While the problem is limited in Moscow, it is pressing and growing in other parts of the country. It is a source for concern. President Yeltsin promised in the summer of 1997 that by 1st January 1998 the arrears would have been cleared. But the reality is that the position is even worse than it was last year. There is a 4 per cent. increase in wage debts at present.

I could give examples of the problems that exist in this area. I conclude by saying that we should not disregard the possibility of difficulties among the labour force in Russia. I hear that major demonstrations are being organised this coming Thursday, with strikes, protests and demonstrations throughout the whole of the country. We should take note of that and do everything in our power to help the democracy to make sure that the country moves forward and not backward.

8.36 p.m.

Viscount Waverley

My Lords, I am going to buck the trend and concentrate my remarks on central Asia—a region of great economic, political and strategic significance to the United Kingdom. We ignore it at our cost. It comprises 52 million consumers, with opportunities not only for modernising the infrastructure and communications networks but also for the development of the region's abundant natural and industrial resources. There is a growing respect for free market principles and the confidence to gain foreign investment, with increasing opportunities for small and medium-sized companies.

The underlying message is that there is a natural desire throughout the region to work with British companies, but while the way is open to enter this market, like all good markets, competition is strong. British success stories abound, however, including the two trade missions last month by the oil and gas sector to Turkmenistan and the British Invisibles mission to Kazakhstan and Uzbekistan. Private sector achievements include Monument Oils' operation in Turkmenistan, BG's Karachaganak operator activities and participation in the Caspi-shelf consortium in Kazakhstan, together with the large investment by BAT in Uzbekistan, all representing the best of British.

That said, I believe that on balance the UK is being slow to react on both the business front and in the political arena. There is a clear need for better understanding of the circumstances and opportunities. We had the opportunity, for example, in this House recently to ratify the Peace and Co-operation Treaty between certain states and the European Union.

I have to say that remarks in relation to Uzbekistan were wide of the mark, made I suspect, without understanding the advances that have been made since having independence in effect forced upon it just six short years ago. Care needs to be exercised when apparently advocating pressure groups' complex agendas without first-hand and up-to-date knowledge of the global picture. Suggesting that other governments conduct their internal affairs in a slim-fit replication of our system, even frankly including the principle of Anglo-Saxon democracy, is not the answer.

On a regional issue, we must stand ready to extol and assist such virtues as the trade-off between short-term costs with long-term benefits in such areas as market reforms, creating a commercial environment with realistic arbitration procedures.

On occasions, the speed of privatisation comes under the spotlight. Economies in central Asia are still dominated by the public sector, with the relatively high political risks that are perceived to go with it. Yet it must be said that privatisation is the often stated central Asian governmental goal.

I can tell the House about the opportunity that the Meredith Jones Group—a company with which I have an association—has created as a first company to privatise part of the Uzbekistan cotton-growing industry. I led a parliamentary delegation to Uzbekistan last year and saw the cotton fields of the Fergana Valley being dramatically improved through new technology. The social and economic benefits of the project to around 70,000 people who are currently at subsistence level are significant, together with major environmental benefits.

President Karimov personally supported Meredith Jones in making this improvement in a key area of the economy, with agriculture in Uzbekistan, as elsewhere, desperately needing this sort of investment. I am pleased to note that Her Majesty's Government have been supportive in helping this UK company achieve its ends.

So, back to the question in hand: how, specifically, can this Government impact developing trade relationships in the region? I think, in one sense, more laterally than in other ways; for example, by being seen to care about real development problems which would give us a comparative advantage in the marketplace. Specific projects could be to assist on the ecological disaster of the Aral Sea or the Semypalatinsk nuclear testing facility, where over a 40-year period 475 nuclear devices, equating to approximately one explosion a month, were tested leaving a radiation catastrophy affecting 200,000 people. We have in this country the expertise to help.

The international fight against drugs, with its impact on regional security, is another area where much more can be done. The civil war in Tajikstan, exacerbated by a steady flow of ethnic refugees combining religious fervour from Afghanistan, and the huge quantities of hard drugs awash in the region with the large oil and gas deposits all around central Asia waiting to be exploited, all add to a possible destabilisation of the wider region.

I certainly noted with great interest a discussion with Prime Minister Sultanov and his team about the contribution that a pipeline routed through Afghanistan could make to bringing peace between the Taliban and opposition factions.

More practical assistance by HMG would be to match countries such as Germany with their considerable government programmes in guarantee schemes, supported credit schemes, feasibility support and assistance. Regrettably, both this Government and previous administrations have not taken an active role in funding or assisting UK foreign investment abroad, taking a much more free market attitude than many of our continental and other competitor countries.

Other key areas where we can impact with low cost would be to ensure that both Downing Street and Secretaries of State free their diaries to greet incoming counterparts.

The good will generated does a great deal to establish opportunities for British business. And we must change the erroneous system so as to calculate British export figures on the basis of final destination, as opposed to credits being given to the country of first shipment outside the UK. That would show a true and different reflection with benefits all round. Moscow, for example, inadvertently gets the credits for trade instead of Almaty and so on.

Finally, the low level of our diplomatic representation in the region is bordering practically on the absurd, yet that said, all posts are being valiantly manned, which will come as no surprise. However, as more British business and other interests venture to central Asia, there must be an incremental increase in officers.

I conclude where I started; thee is much to play for. We as a country must work more actively on all fronts as a friend of the region, which will surely produce benefits.

We must encourage trade and investment, develop cultural, scientific and technical co-operation, encourage environmental protection, do what we can to assist in the essential combat of drugs, and, yes, certainly help to develop democratic institutions and additional respect for human rights, with a strengthening of peace, stability and security for central Asia.

8.43 p.m.

Lord Grenfell

My Lords, I join with other noble Lords in thanking my noble friend Lord Ponsonby of Shulbrede for introducing this important Question. At this late hour there is not a great deal that I could or should add. But I should like to tread briefly on a rather different path—that is, the macro-economic path—and touch on some of the problems that need to be solved if the countries of the former Soviet Union are to be integrated further into the global trading system which will be decisive in determining the degree of this country's commercial penetration of that region.

The newly independent republics' experience has been, and is, very different from that of their old COMECON partners—the countries of central and eastern Europe. Those latter are now exploiting a long, untapped potential for trade with market economies. The European agreements which they signed with the European Union have helped to lock those countries into open trade policies; they provided free access to European Union markets for most of their manufacturers, and, although there are still some restrictions to be removed on imports of sensitive products (particularly in agriculture), the European Union countries have already become the main trading partners of the central and eastern European states, replacing the COMECON members.

European Union and central and eastern European trade has more than doubled since 1989. But, while the central and eastern European states were by the mid-1980s beginning to shift their trade away from COMECON and towards OECD markets, producing a pattern of trade more attuned to market forces, the Soviet Union was stuck in its old ways.

In its very closed economy, Soviet planners fostered specialisation rather than diversification within each republic. The result was very little trade with the rest of the world and very large amounts of trade between republics. For example, in 1989, 90 per cent. of Belarus's trade was with other Soviet republics. That share would have been around 32 per cent. had all the Soviet republics been market economies. Nearly 70 per cent. of Russia's exports went to other Soviet republics—it would have been about 16 per cent. in a market economy framework. The legacy left by that strait-jacket trading pattern is what those countries now have to overcome to break into the global market.

But there is every reason to believe that that pattern will be reversed as the market economy takes hold in those countries. It has been predicted that the countries of the former Soviet Union, as market economies, will send three-quarters of their exports to non-former Soviet Union partners, mostly in western Europe.

As the noble Earl, Lord Carlisle, reminded us, the Baltic states have made substantial progress in reorienting their trade towards market economies. Estonia in particular proved that rapid trade liberalisation pays off. By the end of 1992 it had removed virtually all export barriers, eliminated all quantitative import restrictions, kept only a few low import tariffs and made the new currency fully convertible for current account transactions. The result of that rapid trade liberalisation has been that half of Estonia's exports now go to western Europe and two-thirds of its imports come from there.

We can compare that to the Ukraine which, until the end of 1994, still maintained many price and trade controls and an extensive network of rather ineffectual bilateral trade agreements with other former Soviet Union republics and old COMECON partners. As a result of those counterproductive policies, western Europe accounted for less than 20 per cent. of Ukraine's total trade in 1994. Then the reforms belatedly started. But isolation from world markets delayed enterprise adjustment and perpetuated inefficiencies. As a result of considerable price liberalisation in late 1994 and the elimination of most direct export controls, exports have grown. But the high costs of slow trade liberalisation are still being paid for by the Ukraine.

That has been true of many others among the republics of the former Soviet Union. And it is not just trade policy that has slowed progress in reorienting trade. Many still lack the institutional and physical infrastructure and the expertise to support new patterns of trade and face a steep uphill task in exploiting their new trade potential in market economies. That is especially true for the central Asian republics referred to by the noble Viscount, Lord Waverley, most of whose transport and communication routes run through Russia.

But the reorientation is under way. The integration of transition countries will bring substantive benefits to the world economy. And yet, ironically, there is a recurring concern, even as lip service is paid to the desirability of further integration, that it will come directly at other countries' expense. Certainly integration holds risks as well as opportunities for both sides. Many countries may indeed face adjustment costs. But the evidence suggests that those will be far outweighed by the benefits for all countries of being part of a larger and more competitive marketplace.

Long-term trade integration with Russia and the other republics could involve vastly greater trade flows as countries send energy, particularly oil and natural gas, to western Europe in exchange for capital and technology-intensive goods and high quality consumer durables. But there are some big "ifs". For example, Russia's crude oil and gas export volumes rose by 4 per cent. in 1996 and export revenues were further boosted by higher oil and metals prices. But prospects for long-term export performance are somewhat less encouraging, as oil output dropped to its lowest level in 30 years, sapped by delays in development and infrastructure maintenance projects—something with which the United Kingdom could help. And if that is coupled with declines in world crude oil prices over the longer term, Russia's export revenues will not be rising fast enough to sustain a major import programme unless new investment and efficiency improvements are achieved. My noble friend Lord Ponsonby spoke forcefully of the assistance needed to help them deliver that, in which the UK lags far behind other countries, in particular the United States and Germany.

Let me sum up as follows. International integration is vital for successful reform in the now independent states of the former Soviet Union, especially considering their history of autarky. Imports help make their markets competitive. Exports provide a source of growth and learning. In some areas, foreign direct investment is the only way of acquiring vital skills, markets and finance. Institutional integration is also vital.

The OECD countries especially have a strong interest in encouraging integration by keeping their doors open. Limiting the inflow of goods and raw materials from the 15 republics must not continue indefinitely. In particular, the European Union anti-dumping committee should rethink its policy of restricting the import of cheaply priced extracted minerals from Russia. One can understand Russia seeing this as a double standard since Russia has not adopted comparable policies to protect its producers from the importing of European manufactures and consumer goods.

The adjustment costs to the OECD countries of absorbing the former Soviet Union countries into world trade are manageable. If these countries are prepared to liberalise their trade regimes—an often painful exercise—then their intended trading partners, already integrated into the global economy, must be prepared to shoulder the necessary but manageable costs of adjustment to new trading patterns and increased trade flows. The United Kingdom, traditionally a great trading nation, should be, like France and Germany, as pointed out by my noble friend Lady Smith of Gilmorehill, among the front runners in ensuring that this further integration is not beset with obstacles that can only in the long run deny all countries the benefits of a liberalised global economy.

8.51 p.m.

Lord Newby

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Ponsonby, on initiating this debate. If one takes a long-term view, Russia is bound to be far more significant in terms of UK interests than the vast majority of its trading partners. This is partly simply because of its size and its potential for UK trade. An area of agreement has been reached this evening in that the UK is under-performing in its trade relations with Russia. Indeed, in our debate last week on the importance of exports, the Minister singled out the former Soviet Union as one of the areas where the UK has been under-performing.

Russia's importance to us lies in its position as a guarantor, or not, of the security of Europe. That area has not been much debated this evening but it is clearly of relevance to the overall debate. Although we have inevitably concentrated on Russia, given its scale, if we are to see political stability in the region it is also of crucial importance that the other former Soviet republics succeed economically. A stark example of the scope for instability was found only recently when in the Ukrainian elections a quarter voted for a party which wants "brotherly reunion" with Russia. A major component in the thinking of the people who voted for that party was a sense of frustration at the failing Ukrainian economy and an envious glance at Russia's relative economic success.

As many noble Lords have described, anyone who tries to trade with Russia faces a series of major hurdles. There is a raft of security problems to be overcome. There is a tremendous arbitrariness, to put it no higher, in the decision-making process. The tax code in Russia, as elsewhere, is vastly complex and ever-changing. There are a series of competing bureaucracies to deal with and there is the ever-present political instability, which, while not posing huge day-to-day problems for the Russian on the street, can be hugely disconcerting to those who are seeking to do business with the Russian state. Finally, there is the problem, referred to by the noble Lord, Lord Ponsonby, of the requirement for companies undertaking investment not only to make the investment in the plant, machinery or buildings but also to take on a big social responsibility in, as it were, managing the town as well as the plant in which they might be wishing to have an investment. In Russia over recent months there has been progress on a raft of these difficult issues but the best that can be said is that progress has been patchy.

On the key issue of having clear rules implemented without fear or favour, legal underpinning is being strengthened. Recent movement on the bankruptcy law and simplification of the tax code are two examples of that. There is also a real commitment in some of the regions to accept a market economy and a democratic system of operation. As I was being briefed by my noble friend Lady Williams of Crosby this evening, the region of Perm is also grasping both the scope and the requirements of undertaking the transition to a market economy.

We have heard this evening about the wealth of opportunities within the former Soviet Union for the UK. While I accept all that have been mentioned, I think that, as the noble Lord, Lord Brooke, stressed, the service sector offers peculiar opportunities for the UK, to a greater extent possibly even than the more basic sectors of raw materials and manufacturing.

By common consent our performance to date has been less than satisfactory. Although there have been a number of cases of conspicuous success, we have to accept that trade flows between the UK and the region lag behind our principal trading partners in Europe and elsewhere—Germany, France and Italy, in Europe, and the United States, Japan and even South Korea outside Europe.

Government support to date for trade with Russia and the former Soviet Union, like the reform process in Russia, has been patchy. There have been some good points. The Know-how Fund has made a major contribution in a number of respects. The commercial sections in the embassies have been beefed up, although everything is relative and they are still very small. Trade fairs have been supported and at European level the British Government have supported the TACIS programme and the EBRD. As other noble Lords have mentioned, other British institutions—the Russo-British Chamber of Commerce, the CBI, the British Council and the World Service—have all played a part in helping to provide a climate in which the transformation of the Russian economy can take place.

These are all positives but clearly they are not enough. What then is to be done, as Lenin might have put it? At the European level, I think the point made by the noble Lord, Lord Grenfell, about the position relating to anti-dumping duties, the classification of Russia as a non-market economy and the vexed question of potential WTO membership is an area that must be grappled with. I would welcome any assurance from the Minister that during the UK presidency this area will be looked at afresh. Secondly, with regard to the European level, there is a relatively minor but important point. The TACIS programme is way behind in making payments—sometimes years behind—and this is undermining the credibility of the programme. This is not so much a problem for big enterprises as for smaller enterprises and NGOs. A rocket needs to be put up the administration of the TACIS programme which I hope the Minister might light.

The UK could take a number of practical steps. There has been an increase in ECGD capacity for Russia but it is never enough. We are always running to stand still. We are losing contracts to Germany and elsewhere because we are unable to give British traders the kind of support that they need and that their competitors are getting. Official aid from the UK has fallen dramatically in recent years. Following a relatively high level in the first years of the transition within Russia, in 1996, the last year for which I have seen figures, we stood behind Denmark, France, Germany, Norway, Sweden and Switzerland in terms of official aid. That looks rather poor and I would welcome any assurance from the Minister that that position might be reversed.

Finally, I should like to support the proposal from the noble Baroness, Lady Smith, for the establishment of a Russian Königswinter. When one looks at the history of the original Königswinter over a number of decades, it has been very substantial indeed. It is something which is long overdue for Russia. From the Government's point of view it has the tremendous advantage in that it could almost certainly be done without breaching expenditure limits.

9 p.m.

Lord Fraser of Carmyllie

My Lords, I should immediately declare something of an interest for the avoidance of any misunderstanding. I am the chairman of a company that trades within the Ukraine. I wish that I could boast that it trades with the United Kingdom, but that is for the morrow.

I usually do not waste too much time reading books by those who edit, or have edited, the New Statesman, but anyone who has read Mr. John Lloyd's book Rebirth of a Nation will appreciate what an extraordinarily lucid and at times chilling narrative it is of the painful moves which have been under way in Russia and the former Soviet Union and which continue to move towards something approximating a market economy. Without giving it an unnecessary plug, it is a compulsive read.

My reflection on it all, following from what has been said in your Lordships' debate, is that we should not only be judging the success or desirability of our participation in the countries of the former Soviet Union by the volume of our investment but we should be looking at it in a broader way. The noble Lord, Lord Ponsonby, in opening the debate, emphasised the amount of investment by Germany and the United States. My understanding is that the Germans have had some quite mind-blowing losses in Russia. One might want to ask, "Why should one be too concerned when a competitor nation makes such investment losses?". My response would be that there is a real difficulty for us all in the tumble towards less than careful and studied investment in Russia and other countries of the former Soviet Union which has had the effect of inflating the bureaucracy, complicating the tax structure and, possibly most seriously, bloating the corruption within those countries.

From my time as a Minister at the DTI and thereafter, I confess to a certain hardening of my legal arteries. I hope that the response by Her Majesty's Government to the question of what they are doing to improve trade relations with the FSU will be not only to tell us what they are doing through ECGD and other initiatives, but also to indicate in the most clear and unequivocal terms that they are working to see that a legal framework is secure, that contracts are being honoured, that bureaucracy is being reduced and that taxation demands are both fair and predictable. That would be the ethical foreign policy to which this Government are so keenly trying to aspire.

Like the noble Lord, Lord Newby, I was attracted by what the noble Lord, Lord Brooke, had to say. I have had no doubt that emphasis on the improvement of standards in the fashion that he identified would probably be the greatest improvement and contribution that we could make and would ultimately allow us to make a much better and secure character of investment.

I have no doubt that the noble Baroness, Lady Smith of Gilmorehill, is absolutely right in saying that there is no short cut and that it is a matter of building up trust and friendship. I hope that my noble friend Lord Torrington will agree that hard work is necessary if we are to build up a proper relationship with the FSU rather than rushing, without too much skill and understanding, towards ill-advised investment.

There are two questions that I wish to ask the Minister. If he cannot respond this evening perhaps he will write to me about them. My noble friend Lord Lang, who I regret is no longer in the Chamber, was here for part of the debate. He spent some of his time as President of the Board of Trade in Moscow with the joint trade committee. I trust that that arrangement is continuing. It would be helpful if the noble Lord could tell us the degree of emphasis that the Government give to it, notwithstanding the Prime Minister's visit to Moscow. I shall also be grateful for what he can tell us about the ECGD. As the noble Lord, Lord St. John of Bletso, indicated, I believe that £500 million has been extended in ECGD cover to Russia. I suppose that is broadly desirable. I can imagine the upset that there was in the ECGD when that Prime Ministerial requirement was made.

The question I want to be clear about is this. Can the Minister clarify and confirm to me that the £500 million of extended cover which has been given to Russia in no way has been at the expense of any of the other countries in Central Asia or along the Baltic Sea? That is very important. These countries need to have clear opportunities to develop their economies. We can only offer sensible participation if ECGD cover is available in those countries. I conclude by thanking the noble Lord, Lord Ponsonby, for raising what is for many of us a very interesting debate.

9.5 p.m.

Lord Haskel

My Lords, I thank noble Lords for giving me this opportunity to describe the many different approaches which the Government are taking to encourage the improvement and development of trade relationships with the countries which made up the former Soviet Union. I thank my noble friend Lord Ponsonby for opening the debate.

Perhaps I may at the start assure all noble Lords that we take this matter very seriously. How do we deal with it? Our approach is along a number of lines. I shall deal with them under various headings. They are funding, training, ministerial contacts to provide the personal relationships which many noble Lords thought were so important, and last, but by no means least, encouraging integration into the world trading order to try to deal with some of the difficulties about which many noble Lords spoke.

With the break-up of the Soviet Union it was necessary to set about establishing channels of communication with some 15 countries instead of one. Whereas one joint commission on trade and investment had served the purposes of bilateral trade relations, we now have a growing and diverse group of committees where Ministers and officials meet and encourage companies to do the same.

In some of the smaller countries of the former Soviet Union, trade and industry councils have been set up which operate with the direct participation of the companies giving them direct access to Ministers and officials. There are such trade councils for Azerbaijan, Uzbekistan, Kazakhstan and Belarus. Indeed, they are some of the countries mentioned by the noble Viscount, Lord Waverley. It is relationships with these organisations that are so important that they have to be developed on a personal basis. I can assure noble Lords that our ambassadors will continue to open up channels of communication between our companies and the most influential players in government and business in these markets.

We also work with other organisations and try to benefit from personal relationships with them. My noble friend Lady Smith reminded us of the East European Trade Council and the Russo-British Chamber of Commerce. There is also the British-Ukrainian Chamber of Commerce and the British-Latvian Chamber of Commerce as well as the British Council and the BBC World Service, to which other noble Lords referred.

My noble friend Lord Ponsonby told us that the oil and gas sectors are arguably the most important for the development of many former Soviet Union economies. He is right. Her Majesty's Government have been actively assisting UK exploration and production companies and equipment suppliers to take advantage of the opportunities.

Our Ministers are also active in improving trade relations by supporting our companies in meetings with their counterparts. As noble Lords know, the President of the Board of Trade visited Russia last week and the Minister for Trade will do so in September in support of a trade fair initiated by the Department of Trade and Industry and sponsored by the East European Trade Council specifically to promote British companies. It will take place in St. Petersburg. A similar all-British event was held in Tashkent, Uzbekistan, from 5th to 12th October 1997. This comprised a trade fair supported by cultural and heritage displays. The noble Viscount, Lord Waverley, reminded us of other occasions.

To complement that, Her Majesty's Government encourage government delegations from the former Soviet Union to visit the United Kingdom. The then first Deputy Prime Minister of the Russian Federation, Mr Chubais, visited the United Kingdom last October. There have been a series of other visits.

The noble Lord, Lord Cromwell, and others asked what support the Government are providing. The Department of Trade and Industry is increasing its efforts to help companies into these difficult markets by the provision of support for trade fairs and trade missions, both inward and outward, as well as seminars.

Under the new support for exhibitions and seminars abroad scheme, the DTI will be providing additional support to encourage experienced exporters to take part in Russian events taking place after 31st March 1999. Support will also be available under this scheme for exporters taking part in niche events in the other former Soviet Union countries.

As many noble Lords said, a very important element in increasing exports to the countries of the former Soviet Union is the availability of ECGD cover. The noble Lord, Lord St. John of Bletso, mentioned the increase in cover and the noble and learned Lord, Lord Fraser of Carmyllie, asked me whether the £500 million was drawn from other budgets. I am not able to establish that point at present, but I shall certainly supply written replies. The position is not quite clear. The ECGD provides insurance for UK investors against political risk. A number of projects and investments in the countries of the former Soviet Union have been supported by the ECGD. That also happens in the form of loan guarantees, as my noble friend Lord Ponsonby mentioned.

Trading relationships mean more than imports and exports. For the long-term development of the trading relationship, it is important that they should lead to investment. I am pleased to say that, despite the impression given by some noble Lords, British companies have made significant investments in the former Soviet Union. I am grateful to my noble friend Lady Smith for mentioning some of them. In Russia, for example, according to Russian figures, we were the fourth largest investor in 1997, behind the United States but ahead of Germany. Those investments span a wide range of sectors from manufacturing to consumer goods, through to retail and energy.

An important plank of the Government's policy of encouraging long-term relationships with the former Soviet Union, especially with regard to investment, is funding for trading. The Know-How Fund's training for investment personnel scheme is available for all countries of the former Soviet Union, with the exception of Estonia. Fifty grants have been awarded since the scheme was launched in 1990. Similarly, the joint industrial and commercial attachments programme has been in operation since 1990. It seeks to bring senior and middle managers to the UK for short-term attachments with British companies. That is all part of building personal relationships about which many noble Lords spoke. The scheme has two clear objectives: to introduce former Soviet Union managers to the market economy and help them and the UK companies hosting them to enter into commercial agreements as a result of the attachment. Since the start of the programme, some 150 managers have been brought to the United Kingdom under the scheme.

There are other ways in which the Government encourage companies that look to invest in these countries. Financial support is available to help companies test the ground before embarking upon investments. The Know-how Fund's pre-investment feasibility study scheme offers grants to United Kingdom companies which propose to undertake investment in the region. The noble Lord, Lord St. John, spoke of the importance of the European Union. Yes, the European Union's partnership and co-operation agreements with many of the countries of the former Soviet Union are now the basis for overall trade relations between the United Kingdom and those countries. These partnership and co-operation agreements are also the European Union's vehicle for practical measures to support the integration of the countries of the former Soviet Union into the international economy, especially through accession to the World Trade Organisation.

I agree with my noble friend Lord Grenfell and other noble Lords that the international trading community would like to see these countries fully integrated into the multilateral trading system in order to escape from what my noble friend termed their straitjackets. Membership of the World Trade Organisation is in their interests because it is the best way to secure lasting and substantial trade liberalisation. The World Trade Organisation accession process will favour the introduction of world-class rules and disciplines covering intellectual property, public procurement, standards, and so on. This should raise the confidence of exporters and increase their trade something for which all noble Lords have called. We are keen that the process of negotiation should move along positively, but it will be lengthy.

My noble friend Lord Ponsonby reminded noble Lords that the difficulties of doing business with countries of the former Soviet Union should not be underestimated. I have in mind not only the lack of predictability and transparency in the framework for business. The noble Viscount, Lord Torrington, reminded us of the bureaucracy. Most people who have not visited these countries think of them as lawless places. I agree with the noble Lord, Lord St. John, that, while corruption exists in these countries, it should not and does not deter those companies who know how to learn from the experience of others. In the markets our embassies take the opportunities to bring together British companies so that they can exchange experiences. The Department of Trade and Industry in this country organises events where those involved in doing business share their experience with companies who are contemplating doing business in the same area.

The noble and learned Lord, Lord Fraser, drew my attention to difficulties with the legal framework for business. Usually this concerns the complexity and interpretation of tax and legal provisions or the introduction of unforeseen changes. There are now more ways than ever to discuss and resolve many types of actual or proposed restrictive measures in good time before trade is significantly affected. Bilateral meetings, the new PCAs and the process of World Trade Organisation accession are mechanisms that will highlight and resolve possible barriers to trade in both directions.

The noble Lord, Lord Newby, asked about the TACIS programme. We recognise that TACIS has some faults, particularly in the time taken between initial proposal and project implementation. We are working with other member states to improve the effectiveness of TACIS, but we are very much aware of the criticism.

The noble Lord, Lord Cromwell, asked about a computer network. I suggest that he dials up www.tradeuk.com. In particular, after June, he will discover that there is a database which provides opportunities to do business in many countries, including countries of the former Soviet Union.

I have exceeded my time. I am grateful for all the contributions that have been made this evening. My noble friend Lady Smith suggested that there should be a regular conference with host speakers. Most speakers were enthusiastic about promoting trade. I am sure that the department will take into consideration that suggestion. There has been a marked increase in the trade that has been carried on with the countries of the former Soviet Union as the overwhelming majority of the region's economies introduce market reforms. The whole purpose of our promotion of trade is to introduce the efficiencies of the market economy about which many noble Lords have spoken. It is also our mission to see that that promotes the further opening of EU markets to goods from former Soviet Union countries. We are working for their integration into the world trading system via the EU. I thank all noble Lords for their contributions.

House adjourned at twenty minutes past nine o'clock.