Magazine article Risk Management

Russia

Magazine article Risk Management

Russia

Article excerpt

Oil and power politics

Between 2000 and 2008, the Russian Federation developed an international reputation for endemic corruption and unshakable bureaucracy under President Vladimir Putin. Simultaneously, its economy enjoyed huge growth due largely to the soaring prices of oil, gas and other commodity exports. Awash with cash, Moscow is now looking to leverage its highest level of sovereign power in half a century. Russia's recent military intervention in neighboring Georgia only underscores that point to an alarming degree.

With its recent presidential elections and governmental restructuring, Russia has an opportunity to change the resurgent yet retrograde perception of its economy, and the stain of an endemically corrupt bureaucracy that cannot resist clamping down on the very free enterprise system it rhetorically supports--and seemingly needs to expand its economy outside the commodities sectors. The Georgian crisis will be difficult for Moscow to shake, but the initial year of the Putin protege Dmitry Medvedev's presidency will prove pivotal in assessing whether his pledges to end "legal nihilism" and ensure "true respect for the law" will take hold and whether Russia's risk climate can shift to a more acceptable level.

Putin's influence can still be felt, however. This summer, Putin called for the creation of a government commission that would decide on foreign requests to buy into key sectors of the Russian economy, namely gas, oil and the media. Speaking to the Interfax news agency, Putin outlined that the commission's "primary goal is to consider applications of our foreign partners for the purchase of enterprises in strategic branches of the Russian economy."

Under this proposal, foreigners seeking to invest a 25%-50% stake in Russian companies would be required to apply for approval from the government commission. This provision concerns many buyers, who fear that negotiating the traditionally complex web of state bureaucracy and security services would become even more difficult.

Putin stressed that, to the contrary, the new legislation would simplify the rules for foreign investors, creating transparent and clear procedures for all. This move to tighten controls can be seen as a countermeasure to the long-perceived lack of regulatory law, the primary political risk in Russian markets.

The measure would extend to over half of the country's economy. Industries defined as "crucial to national security" under the legislation include: nuclear, aerospace, arms, oil and gas, media and even fishing. Finance minister Alexei Kudrin has noted that the list of "strategic" sectors defined could be reduced, but the installment of the commission is being viewed by many as the state's attempt to regain control of sectors privatized after the collapse of the Soviet Union. …

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