A looming crisis in Russia

Fred Weir

The price of Russia’s main export, oil, is hovering at record highs. The government is currently pocketing nearly $20 on every barrel produced. 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 favour 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 Centre for Political Information, an independent Moscow think tank.

The Kremlin blames the warring Russian bureaucratic clans for smothering growth and fuelling social discontent, and has issued an urgent appeal for all to unite behind President Vladimir Putin or face a looming crisis. For the past year, the Kremlin faction of siloviki, a term derived from the Russian word meaning “force,” has held the upper hand. Critics say the economic damage of their heavy-handed interventionism is plain to see. GDP rose at an annualised rate of 4.4 per cent in the first two months of this year, down from 7.1 per cent in 2004. A recent report by the World Bank fingered the Kremlin’s anti-business policies, particularly last year’s effective re-nationalisation of Russia’s most profitable private company, the oil giant Yukos. Unexpected bills for “back taxes” have been presented to companies such as telecommunications giant Vimpelcom, while some foreign firms have been barred from bidding on new natural-resource exploration licenses.

In what could signal a change of course, Putin met with business leaders last month to pledge that the seizure of Yukos would be the last episode of its kind. To bolster confidence, he offered to reduce the statute of limitations on prosecuting illicit privatisation deals to three years from 10, a move that would effectively legitimise most property acquired during the 1990s. He also promised to rein in Russia’s tax collectors, who’ve been the siloviki’s main instrument. But business leaders say there is less to Putin’s olive branch than meets the eye, and they want to see more tangible evidence that the Kremlin’s free-market wing is winning the war for control of economic policy.

The Kremlin’s new outreach to private business does not extend to leniency for the top executives of Yukos, who are on trial for fraud, embezzlement, and tax evasion. The company’s former security chief, Alexei Pichugin, who was charged with ordering a double contract killing, was handed a 20-year prison sentence on March 30. Prosecutors in the case of Yukos’s founder Mikhail Khodorkovsky are demanding he be given the maximum sentence of 10 years hard labour. Monday, he made his final plea of innocence. The judge is expected to announce the verdict on April 27. Underlying the looming crisis, critics argue, is the economy’s long-term failure to generate a viable middle class — the bulwark of social stability in most developed countries — based on a rising tide of small and medium businesses. According to OPORA, a Russian business association, Russia has about 900,000 small companies — around the same number as a decade ago — which account for 12 per cent of GDP. The Kremlin concern, experts say, is that rising poverty, social inequality, and public unrest could spark a crisis that the country’s squabbling elites would be unable to manage. — The Christian Science Monitor