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Last Updated: Tuesday, 31 May, 2005, 10:03 GMT 11:03 UK
Why business is still wary of Russia
By James Arnold
BBC News business reporter

Vladimir Putin on TV screens
Mr Putin wants the state to set business right
It may be hard, at this late stage, to summon up much sympathy for Mikhail Khodorkovsky.

"There's only so long that you can stay sorry for a billionaire," says one Moscow-based British businessman.

"When he was arrested, everyone was jumpy for a couple of weeks. But now it's back to business as usual."

Trouble is, "usual" in Russian terms means ugly, unpredictable and downright dangerous.

Mr Khodorkovsky's conviction on charges of fraud and tax evasion has done much to besmirch Russia's reputation in the business community. In fact, the economy's real problems are different - and far deeper.

Anguish to apathy

In the year-and-a-half since Mr Khodorkovsky was arrested on a Novosibirsk runway, the business world seems to have come to terms with his fate.

The notion that the hounding of one oligarch sounds the knell for freedom and reform finds few takers; indeed, some see it as a welcome departure from the chaotic crony capitalism of the 1990s.

Foreign direct investment

By some measures, investors are positively bubbly: foreign direct investment was a record $9.4bn, up nearly 50% year on year. Russian shares clattered downwards in the weeks after Mr Khodorkovsky's arrest; since then, they have risen by 45%.

In part, this is the result of Mr Putin's avowedly tough stance on law and order. But it's also an admission that - contrary to what one might read in the newspaper - he is not wholly hostile to business.

The government is, for example, introducing a low flat income tax to tempt money back into the country. And privatisations more than three years old will now be irrevocable, rather than the 10-year clause that worried many investors.

Keeping control

Not that joy is wholly unconfined.

Statistics on foreign investment look a little less impressive under scrutiny.

Fully two-fifths of the national total goes to the city of Moscow alone, with another fifth going to two ice-bound oil-producing regions. Drilling wells and selling mobile phones to Muscovites remain popular; pretty much the rest of the country, including swathes of rusting Soviet-era industry, is going begging.

Smaller but keener Poland, meanwhile, has earned twice as much as Russia since the collapse of communism.

And Mr Putin's views on reform are not exactly straight out of Harvard Business School.

In his annual address to the upper house of parliament this week, Mr Putin insisted he would stick to, and even extend, the current policy of limiting foreign investment across a range of sectors - sectors such as natural resources, which happen to be in the keenest demand.

"This approach will be fair to both society and the state, which should protect its prospective interests and take care of the country's development for years and decades to come," he said.

Reformers rejected

This heralds a long-awaited shift in policy.

During Mr Putin's first term in office, in 2000-04, he trod a fine balance between classic liberal reformers - such as Finance Minister Alexei Kudrin and Economics Minister German Gref - and conservatives from the security services, often known as siloviki.

Alexei Kudrin
State intervention is a disease, Mr Kudrin diagnoses
Little, tidy countries like Hungary and Slovenia may benefit by throwing open their doors to capitalism, the siloviki argue, but a sprawling place like Russia requires a firmer hand. The example of China, which has achieved economic growth in an authoritarian state, is ceaselessly cited.

Since Mr Putin was crushingly re-elected, the siloviki have been in the ascendent.

The civil service is being reinforced, and Mr Putin promises to raise public-sector salaries by 50% above inflation. The tax take has hit a record of 23% of gross domestic product, and the government is frantically beating the bushes for revenues: collection of back taxes last year trebled to 470bn roubles (9bn; $17bn), according to the World Bank.

Mr Kudrin - a crucial comfort figure for investors - is becoming increasingly jittery. This week he said the government's compulsion to interfere in the economy was a "serious disease".

Going soft

The sickness would be a lot more bearable if the economy were still firing on all cylinders. However, things have gone a little floppy of late.

Economic growth
Headline growth figures, at around 6%, are still healthy by international standards, but are predicted to keep easing - even if oil prices don't take a dive. Mr Putin has promised to double output by 2010, a target that looks likely to be missed by miles.

Inflation, fuelled by petro-dollars, remains above 20% - scarcely terrifying, but again way above Mr Putin's 3% target.

And Russians' confidence in Mr Putin is somewhat belied by the $10bn or so they annually squirrel away outside the country, despite repeated official predictions that capital flight could soon be reversed.

If Russia is coming off the boil, now might not be the time to shift away from road-tested methods of economic reform. Worse, it could demonstrate that Mr Putin, despite his self-assurance, is no more capable of effecting change than his hapless predecessor, Boris Yeltsin.

All in all, far more worrying than the legal problems of an off-message oligarch.


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