Russia's unwise war on business

Yegor Gaidar, Project Syndicate

I want Russia to be a boring country -- at least for the next few decades. In the twentieth century, Russia set an unquestionable record for all sorts of upheavals and social experiments that attracted the world's attention. A time-out is essential.

This objective seemed to be entirely within reach -- or at least possible -- until the first half of 2003. Foreign correspondents accredited in Moscow complained that nothing was happening in Putin's Russia. Investment in the Russian economy was growing fast. Unfortunately, Russia's rulers are not accustomed to leaving the country and the rest of the world for long without something surprising to gawk at.

Instilling a feeling of insecurity is the best way to scare your population into submission and frighten away potential investors. How democratic or undemocratic a regime is usually doesn't bother investors. All they need and care about is stable, predictable rules.

Indeed, the watchword among major investors is inertia. It takes time to reach a decision on whether or not to invest in a project, and once an investment decision is made, it becomes rather difficult to stop the process quickly. Russia's government is now doing its best to prove that, while difficult, it is possible to defy the laws of business physics and kill investments that are already in the pipeline.

When Mikhail Khodorkovsky and other executives of Yukos, his oil company, were arrested last year, corporations investing or interested in investing in Russia were prepared to interpret the crackdown as an isolated incident brought on by the political agenda of the company and its CEO, who should have known better. Never mind that by the second half of 2003, it had become obvious that the government intended to use legal means -- in the form of massive tax claims -- to destroy the company.

When only one company faced legal and financial problems, investors who had made a decision to put their money in Russia were ready to ignore this kind of development. "This must be an exception," they kept repeating, like a mantra or a prayer. I've heard something similar when Russian problems are discussed: "Just finish this Yukos affair. We don't care how it goes, just put an end to it."

Unfortunately, the genie has been let out of the bottle. Throughout 2004, it became abundantly clear that Russia's internal security apparatus had gained the upper hand in deciding how to manage economic and political problems. Security structures developed a taste for this kind of work, and welcomed new responsibilities. In many ways, they began to see fighting big business as akin to fighting terrorists. And, indeed, they share one thing in common: The fight never ends.

More and more tax claims are being produced, and not only against Yukos. Tax claims against the telecommunications company Vympelkom (one of Russia's leading firms, and the first to be listed on the New York Stock Exchange in 90 years) send an unambiguous signal to investors: no one is safe.

In fact, official documents have now even started questioning the legitimacy of the privatization of the leading Russian companies in the 1990s, which has opened the way for discussions about revising the outcomes of these privatizations. Similarly, British Petroleum, which has invested more in Russia than any other company to date, has recently discovered that its rights to the Kovytkino gas field are not guaranteed at all. This property, it now seems, could be reclaimed by the state at any moment.

It would be wrong to draw long-term conclusions from short- term economic information, even if this information confirms reality. The alarming tendencies we are seeing today may be short-lived and with no serious consequences. Post-socialist growth is a process that cannot (and should not) be easily stopped.

If, however, the authorities continue their efforts to destabilize the Russian economy, today's disturbing tendencies may actually take root. Russia can then forget about attaining the fast, sustainable growth that China has achieved. Instead, we Russians will find ourselves trying to avert an impending economic crisis.

Of course, no one can predict when such a crisis might occur. But one thing is certain: we will know which path the country's leaders have chosen sooner rather than later. Indeed, this year could be Russia's most fateful yet.

The writer was Russia's first democratic Prime Minister and is now Director of the Institute for the Economy in Transition.