Oil booms, but investors flee Russia
The Kremlin is torn between a free-market model and a state-run economic vision.
The price of Russia's main export, oil, is hovering at record highs. The government is currently pocketing nearly $20 on every barrel produced.Skip to next paragraph
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So why are foreign investors running for the exits, and the country's economy suddenly slowing?
A high-stakes battle for the direction of the Russian economy is creating new uncertainty, prompting investors and others to pull back. On the one side are Russian liberals, who favor rapid market reform and merging with the world economy. On the other are the siloviki, ex-security men who want to build a state-guided economy.
"This struggle between siloviki and liberals is starting to pull down our economy," says Alexei Mukhin, director of the Center for Political Information, an independent Moscow think tank. "The Kremlin really fears becoming isolated and losing control."
The Kremlin blames the warring Russian bureaucratic clans for smothering growth and fueling social discontent, and has issued an urgent - almost
apocalyptic - appeal for all to unite behind President Vladimir Putin or face a looming crisis.
"Unless we are able to consolidate our elites, Russia as a single state may disappear," Kremlin chief of staff Dmitri Medvedev said in an unusually blunt interview last week in the business magazine Expert. "Whole empires have been wiped off the face of the earth when their elites lost their unity and engaged in deadly battles.... The breakup of the Soviet Union will look like child's play compared to a government collapse in modern Russia."
For the past year, the Kremlin faction of siloviki, a term derived from the Russian word meaning "force," have held the upper hand. Critics say the economic damage of their heavy-handed interventionism is plain to see. Gross domestic product rose at an annualized rate of 4.4 percent in the first two months of this year, down from 7.1 percent in 2004.
According to Russia's Central Bank, capital flight quadrupled last year as worried investors shoveled their assets offshore. Net capital outflow jumped from $1.9 billion in 2003 to $9.4 billion.
A recent report by the World Bank fingered the Kremlin's antibusiness policies, particularly last year's effective renationalization of Russia's most profitable private company, the oil giant Yukos. "The protracted Yukos affair has been the center of attention, but many other companies have also apparently experienced increased harassment," the report stated.
Unexpected bills for "back taxes" have been presented to companies such as telecommunications giant Vimpelcom, while some foreign firms, including BP-TNK, a 50-50 British-Russian joint oil venture, have been barred from bidding on new natural-resource exploration licenses.
"This is the only country in the world where the state sector is growing," wrote former Kremlin economic adviser Alexander Livshits in the daily Izvestia last week. "Last year, the capitalization of state companies grew by 70 percent. No matter what else happens in the economy, the state always seems to win."