The Mail on Sunday: CASH AND THE KREMLIN – Special Report: RISKY RUSSIA

EXTRACT: Despite protests at the highest level, President Vladimir Putin seems determined to seize control of the investments of Shell and BP, which he sees as ‘strategic assets’. If Putin succeeds, British businesses love affair with the country could turn as cold as a Russian winter.

THE ARTICLE

Gorbachev was feted as a man to do business with. But can the same be said of his booming country under Putin as capitalism runs riot?

By Tom McGhie

Margaret Thatcher famously described Soviet leader Mikhail Gorbachev as a man she could do business with. Twenty years later, British companies have been following her lead.

Britain is now the largest single investor in Russia, by far the biggest economy of the former Soviet empire. The country is booming on the back of its huge natural resources of oil and gas. Hundreds of British companies, led by BP and Shell, have poured in billions of pounds.

But despite the revolutionary changes, doing business there is not for the faint-hearted. Bribery and corruption are rampant and Russia’s civil service and its legal system are both riddled with dishonesty. Murder is a fact of business life. A senior BP engineer was shot recently and last week Zelimkhan Magomedov, president of the National Oil Institute Fund, was gunned down in Moscow.

UK businessmen have not been put off by crimes like this or by the prospect of being banned from the country.

William Browder, who runs Hermitage, one of Russia’s largest investment funds, was turned back at the border last year. Hfe has a reputation for causing problems for Russian companies that do not meet the highest corporate standards. However, he and his fellow businessmen cannot ignore the stunning potential returns.

As the oil money percolates down from the billionaire oligarchs to ordinary Russians, demand for consumer goods and Western brands is booming.

Soaring house prices – up 80 per cent last year – have attracted leading UK estate agents such as Savills and Knight Frank.

The second annual Millionaire Fair was held in Moscow recently and one of the most popular baubles on show was a £700,000 diamond-encrusted mobile phone. Rolls-Royce and Bentley showrooms abound.

To service the growing army of British business travellers, bmi has recently started a twice-daily service to Moscow while British Airways has been given permission to add a third daily flight on the route.

And the traffic is not just one way. There are about 250,000 Russians – including some of the super-rich – living in and around London. Many are profiting from the massive growth of Russian companies on the London Stock Exchange. Russian corporations are looking to raise £2.5 billion on the LSE alone.

While Britain is the largest overseas investor in Russia, it is also the most attractive destination for Russian capital flowing out of the country.
Bilateral trade was worth £5 billion last year. More than 400 British companies operate in Russia and BP’s total investment stands at more than £4.2 billion.

Economic growth has been impressive – about seven per cent last year with 6.9 per cent predicted for 2006. Inflation plunged from 90 per cent in 1998 to 12 per cent in 2003. And over the past five years Russia has paid off all of its debts. 

Real wages rose by nearly 12 per cent last year. In 2000, almost one in three Russians^ lived in poverty. Today, that has fallen to one in five.

But while the lure of Russia is great, so are the potential pitfalls. British firms are being warned that they need to have plenty of pioneering spirit if they intend to do business in the country.
 
They are told that they must be tough and that they need to have good legal back-up. They are advised against paying bribes. Roger Munnings, KPMG’s managing partner in Russia, says: ‘When we set up here, we were asked for bribes, but we never paid.’

British Embassy sources claim that at least one UK company has abandoned business in Russia because of the corruption. However, the biggest threat to future investment may not come from the sharp practices of Russia’s business world, but from its politicians.

Despite protests at the highest level, President Vladimir Putin seems determined to seize control of the investments of Shell and BP, which he sees as ‘strategic assets’. If Putin succeeds, British businesses love affair with the country could turn as cold as a Russian winter.

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