Russia Is Still Tricky Place to Do Business with Putin's Man Medvedev at Helm; Cosmetic Change: Medvedev, Pictured with His Wife Svetlana, Takes Power in May

Article excerpt

Byline: EDWARD LUCAS

HERE is a good Russian fairytale. Once upon a time a huge country endeddecades of political and economic isolation. After some rocky years, a stableand probusiness government took over.

Oil prices rocketed, living standards soared and everybody made lots of money.Risks were high, but rewards much higher. A few nitpickers and naysayerscomplained about human rights, but nobody listened to them.

The clever foreign investors who saw what was really going on lived happilyever after.

That, roughly, is how most businesses see Russia, as Dmitri Medvedev preparesto succeed Vladimir Putin in the

Kremlin following last week's farcical election. Gone are the days whenbusiness life was simply about getting raw materials out of the country as fastas possible, or consumer goods in. It would be far too early to say that Russiais a normal European country. But for a big chunk of the population it isincreasingly looking that way.

Sophisticated markets are developing in residential property, personal finance,insurance and construction.

The bureaucracy may look nightmarish but no worse than in other emergingmarkets. It is even possible to dismiss the highly publicised disastersencountered by energy giants such as BP and Shell.

These companies struck highly advantageous deals in the 1990s when Russia wasin no position to bargain hard.

Now the tables have turned, and it is no longer possible for foreign energyfirms to have controlling stakes in the crown jewels of Russia's energyreserves such as the gas fields in Kovykta in Siberia, or Sakhalin in the fareast. BP and Shell respectively have been forced to cede majority stakes, worthbillions of dollars, in these projects.

The bureaucratic harassment, alleging phoney environmental and contractualinfringements, was outrageous in one sense, but many would regard the outcomeas a kind of rough justice.

All that is true, but not the whole truth. The real point about Russia is thatit is in a different category from the other emerging markets, Brazil, Indiaand China, with which it is commonly lumped together. It is not just that it isthe smallest, and with the worst demography (every minute roughly four Russiansdie and only three are born). Nor is it the clogged infrastructure or difficultclimate.

The real problem is that Russia lacks the rule of law, and the politicsnecessary to build it. One symptom of that is the continued imprisonment ofMikhail Khodorkovsky, the founder of the Yukos energy giant, once Russia'strophy example of westernstyle management and shareholder value. …