International Herald Tribune: Russia tries to keep politics out of business

By Andrew E. Kramer
Friday, May 25, 2007

MOSCOW: The Kremlin is hoping it can put a positive gloss on economic developments here at a coming forum for business leaders in St. Petersburg, highlighting gains in the Russian economy that have been overshadowed recently by a flurry of negative political news from Russia.

The Russian government has billed the June 8-10 gathering in St. Petersburg as a sort of World Economic Forum for emerging markets, with a focus on Russia’s oil-driven economy.

Indeed, economic growth in Russia has been defying critics who said the worsening political climate between the Kremlin and the West might stunt investment. In the first quarter of this year, for example, gross domestic product grew 7.7 percent; foreign investment is up 150 percent over the period a year earlier.

Meanwhile, Russian officials have been fending off accusations that a former agent in the Federal Security Service, the successor agency to the KGB, killed a defector in London with radioactive poison, in one of several disputes indicative of the souring mood between Russia, the United States and the European Union.

German Gref, the Russian minister of trade and economic development, said during an interview this past week that he would assure investors that property rights remained intact in Russia, and that his ministry would adhere to the liberal economic course of recent years.

“The key thesis we would like to convey is that Russia underwent a very serious transformation,” Gref said during the interview at his ministry office in Moscow. “Now it has arrived at the stage of its modernization.”

Russia’s economic goals, he said, depend on an openness to global investment. This is a policy, he said, that is no longer a matter of debate in the Putin administration.

“This can only be done if the economy is open to foreign investment, with an auspicious investment climate, security for property rights and stable macroeconomics,” he said. “Our action is geared toward those goals.”

Analysts, however, have cautioned that a certain hubris is creeping into Russian economic policy, prompting excessive spending of the oil windfall that threatens to spark inflation, undermining policies put in place by Gref and other liberals in the cabinet. A hard-line faction of national security officials is seen as advocating increased military spending and state ownership.

This past week, President Vladimir Putin suggested government oil revenue might be invested in the Russian stock market to prop up the lagging performance of state companies, something that would signify an even greater interventionist economic policy by the Kremlin. This prompted a blistering note to investors by Goldman Sachs suggesting that the liberal wing might be losing influence over economic policy.

“Perhaps most worrying about this proposal is that it is a sign of the deterioration in the quality of economic policy advice received by the president as he approaches the end of his presidential term,” Goldman Sachs wrote in a research note.

During the interview, Gref said he and a fellow liberal, finance minister Aleksei Kudrin, remained firmly in charge of economic policy. “The direction is established,” he said. “There’s no alternative to an open, market-based economy.”

A trend of creeping state control over the economy is another development worrying to investors. Last fall Gazprom, the natural gas monopoly, acquired 50 percent of a Royal Dutch Shell development on Sakhalin Island in a forced sale. That followed the effective nationalization of Yukos, once Russia’s largest private company. And this spring officials have threatened to revoke a major gas field license held by a joint venture of BP in Russia, TNK-BP.

Outside of oil and natural gas, the Kremlin has consolidated control over aircraft manufacturing, domestic automakers, diamond mines and other industries. Gref, however, said state intervention in sectors other than oil and gas should be seen as temporary, merely an effort by the government to restructure ailing Soviet-era industries. They will eventually be re-privatized “up to 100 percent,” he said.

Moscow is in the midst of the first oil boom since the collapse of its empire, meaning the windfall is no longer diminished by subsidizing client states with low-cost energy, as was the case with the Soviet Union in the 1970s. The country now pumps more oil than Saudi Arabia, and has the cash flow to show for it. The country, Gref said, is “uniquely attractive” to investors.

Just in the first quarter of 2007, Russia has attracted $10 billion in foreign direct investment, according to the state statistics service. At this pace, Russia is likely, by the date of the economic forum in June, to surpass in just six months the total foreign direct investment into Russia in the entire decade of the 1990s under Putin’s predecessor, Boris Yeltsin, which amounted to $16.6 billion, according to Peter Westin, chief economist at MDM bank in Moscow.

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