Russia after Dark; Private Really Means State-Owned

Article excerpt

Byline: Rachel Ehrenfeld and Alyssa A. Lappen, SPECIAL TO THE WASHINGTON TIMES

Confronted with criticism over its increasingly restrictive policies, lack of economic freedom and growing corruption, Russian Economics Minister German Gref boasts that direct foreign investment in Russia grew 100 percent in the first quarter of 2006.

But jubilant investors should beware. A recent report from the Council on Foreign Relations on "Russia's Wrong Direction" warns "that anyone can become vulnerable when the state bureaucracy, either at the president's direction or merely with his support, decides to seize private assets." U.S. doubts regarding Russia's accession to the World Trade Organization reflect those concerns.

To make Russia's opaque markets more palatable, Russia is now paying millions to the New York-based PR firm Ketchum. Considering Russia's level of corruption, the PR firm faces a daunting task.

An October 2005 survey by the Russian think-tank Indem found such a large increase in the volume of business-related bribes that their total exceeded twice Russia's federal budget. Russian corruption is symptomatic of problems, including "a neutered parliament, subservient (and sometimes intimidated) media and a suborned judiciary," says Indem's Georgy Satarov.

Another Russian economic limitation is the government's penchant for appropriation of private assets. First Deputy Prime Minister Dmitry Medvedev said on June 2 that Russia should retain control over strategic companies, according to Itar-Tass. Mr. Medvedev, a likely contender for the Russian presidency in 2008, admits the government is "not the most efficient proprietor." However, he insists that Russia should control companies "vital for the country," including defense, atomic energy and natural resource giants like Gazprom, whose board he heads.

Companies in other industries, he said, "can and must become private property." But he adds that the government can "enlarge its role in certain companies for a certain period [whenever] necessary to put the companies in order." Clearly, "private" in Russia does not really mean private.

Ironically, the Kremlin threatens retaliation against those nations concerned with Russia's proposed entry into the WTO. Spokesman Dmitry Peskov recently warned, "If you discriminate against us in the WTO, you can't expect us to welcome you with open arms."

A former senior U.S. Treasury official on Russian affairs, Mark Medish, says, "*verall the private and state sectors both suffer from endemic corruption." He adds: "[T]he institutions needed for the rule of law, enforcement of contracts and protection of property rights are still weak in Russia; furthermore, there is concern that the Putin administration has tended to undermine rather than build up these institutions. The trend is worrisome."

The sagas of VimpelCom and Megafon, Russia's second and third largest mobile telephone operators, exemplify difficulties arising from Russia's corruption and lack of transparency. …