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'Climate of fear' puts brakes on Russian economy

Many businesspeople say an upcoming official report on privatization could lead to more takeovers like that of oil giant Yukos.

By / February 3, 2005


A surprise slump in Russia's recently booming economy has growing numbers of businesspeople, economists, and even a few officials warning that the bill may be coming due for the Kremlin's often heavyhanded treatment of private companies.

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Anatoly Chubais, architect of Russia's privatizations during the 1990s, said last week that a "climate of fear" has descended over Russian business. The culprit: aggressive Kremlin policies, such as the effective renationalization of the oil giant Yukos, reports that Russia's secret police are spying on private businesses, and an official reassessment of the way major companies acquired their property.

"There has not been such a difficult situation for 15 years," Mr. Chubais said. "When entrepreneurs don't know what will happen, they will base their views on a pessimistic scenario."

At the Davos World Economic Forum in Switzerland this week, Kremlin adviser Arkady Dvorkovich admitted what many economists have suspected for months: Russia's economic growth has plunged since last summer, and next year's forecast is around 4 percent, half the rate of growth during President Vladimir Putin's first year. Mr. Dvorkovich added that, "We need to restore confidence in what the state is doing."

The news could hardly be worse for Mr. Putin. He came to power five years ago pledging to kick-start Russia's flagging Soviet-era economy through reforms and market-driven modernization. Instead, perceived bureaucratic abuses, especially the state takeover of Yukos - which Putin had sworn to prevent - appear to have deflated business confidence and triggered an exodus of desperately needed investment capital.

"We have no economic growth, despite extremely favorable external conditions," including the high price of Russia's main export, oil, says Anton Struche-nevsky, an economist with Troika Dialogue, a leading Moscow investment firm. "The economy is stagnating. The level of uncertainty is huge, and uncertainty means many investment plans get cancelled."

Putin's arrival in the Kremlin was hailed by many liberals, who said the stability and order he promised would liberate market forces to remake the economy. But Putin's increasingly tough rule seems to be leading to different results.

"We felt inspired [when Putin came to power], and hoped we could move ahead with politically stable authorities and a reform majority in the Duma," says Yevgeny Yasin, rector of the Higher Economic School in Moscow. "But now we see growing conflicts between the authorities and business. The window of opportunity is closing."

Yukos, once Russia's most profitable company, has been brought to the verge of bankruptcy by a barrage of back-tax bills totaling $29 billion. The company's founder, Mikhail Khodorkovsky, has been imprisoned for more than a year on charges related to illegal privatization and tax evasion, though many experts say he was singled out for prosecution on political grounds. Late last year, Yukos's main unit, Yuganskneftegaz - which pumps more crude daily than Libya - was sold in a closed auction, at a discount, to the state-owned oil firm Rosneft.