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Reuters: ANALYSIS-Investors fret over Russia’s 2008 dogfight

EXTRACT: Some suspect the battle over the Shell-led Sakhalin-2 energy project, which officials accuse of environmental breaches, may be evidence of one bone being fought over.

THE ARTICLE

11 Oct 2006 11:37:19 GMT
By Elif Kaban

MOSCOW, Oct 11 (Reuters) – Winston Churchill once likened Kremlin politics to watching two dogs fight under a carpet — you know there’s a furious spat going on but can’t see what’s happening.

Now the carpet is stirring ahead of presidential elections in 2008, and investors are getting out of the way.

President Vladimir Putin is due to step down unless he changes the constitution to allow himself a third term — something he has repeatedly said he will not do.

Nobody knows who his chosen successor will be. Under Russia’s Kremlin-dominated political system, the candidate endorsed by Putin is virtually certain to win the election.

Many investors are positioning defensively as the succession game kicks off, ignoring official assurances the transition will be stable and peaceful.

“There is so much money at stake, entire sectors of the Russian economy are at stake. Everything is at stake,” said Georgy Bovt, editor of Russian business magazine Profil.

“The people at the top are feeling insecure about their future after Putin. As elections approach, inter-factional struggles at the top levels of Russian politics will get worse.”

INTO THE UNKNOWN

The jockeying for power is not between rival parties but within existing power structures in a country where the political system is built around the president.

A recent Financial Times survey of Putin’s inner circle showed 11 members of his administration held the post of director or chairman at 18 companies in key fields like energy.

Kremlin spin-doctor Gleb Pavlovsky said Russia faced “a transition into the unknown”.

“‘The president equals Putin’ is what people think, and that poses a political challenge,” he told Ekspert magazine recently.

But Kremlin spokesman Dmitry Peskov said it was too early to make the election into an “active issue”.

“Everything will go in accordance with our procedures and the constitution. I don’t see any reason for worries,” he said.

Bovt said two unsolved assassinations in the past month were signs of trouble. The killings of central banker Andrei Kozlov and investigative journalist Anna Politkovskaya have damaged the image of normality that Putin has been trying to promote.

“These murders, although not directly connected to the struggle for power, reflect growing tension at the top levels,” he said.

Investors are taking no chances, bracing for uncertainty.

“From the beginning of next year, we’ll probably see things slowing down,” said Andrew Baxter, chief financial officer of Alfa Bank. “Businesses will want to take stock of what direction this country is going. The funding environment may dry up.”

CASH-OUT TIME?

There’s no sign of that yet in Moscow, where traffic clogged with brand-new luxury cars is snarled up in autumn drizzle.

Hard currency reserves of $267 billion are dwarfed only by those of China and Japan, and the economy is in its eighth year of growth.

But investors worry the rewards may wane, with stock market gains of 80 percent in 2005 and 40 percent so far this year already in the past, and uncertainty over future oil prices.

Some are calling it cash-out time, said David Smith, chief investment officer of Global Asset Management in London, a fund of hedge funds group running $25 billion of assets.

“People are slowly backing off,” Smith told Reuters.”The risk-return ratio in Russia is becoming unbalanced. A lot of people are cutting down exposure to Russia.”

Analysts say much depends on when Putin makes his choice: if he holds until the last minute, there will be longer to fight, but if he makes his choice early he may become a lame duck.

It’s like “watching something in the dark,” said UBS chief economist in Russia, Al Breach.

“The carpet is stirring and the factions are positioning themselves, but it’s hard to know what’s going on — things are very opaque,” he said. “Markets don’t like lack of clarity.”

Investors say one fault line is between a business-friendly group including liberal Economy Minister German Gref, and groups with ties to security services who favour tighter state control.

Some suspect the battle over the Shell-led Sakhalin-2 energy project, which officials accuse of environmental breaches, may be evidence of one bone being fought over.

But spokesman Peskov said there were differences of opinion, not factions within the Kremlin.

“(Sakhalin) is a case where we have unanimity of points,” he said. “The environmental damage is obvious. When certain actions are taken there’s no need to politicise it.”

Sergei Markov, an analyst with Kremlin ties, predicted that “new forces” would emerge, rooted in big business interests.

“In China they were concentrated around the military commission of the Central Committee of the Communist Party,” he said. “Putin’s power will focus around a system of mega corporations.”

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