'Climate of fear' puts brakes on Russian economy

A surprise slump in Russia's recently booming economy has growing numbers of businesspeople, economists, and even a few officials warning that the bill may be coming due for the Kremlin's often heavyhanded treatment of private companies.

Anatoly Chubais, architect of Russia's privatizations during the 1990s, said last week that a "climate of fear" has descended over Russian business. The culprit: aggressive Kremlin policies, such as the effective renationalization of the oil giant Yukos, reports that Russia's secret police are spying on private businesses, and an official reassessment of the way major companies acquired their property.

"There has not been such a difficult situation for 15 years," Mr. Chubais said. "When entrepreneurs don't know what will happen, they will base their views on a pessimistic scenario."

At the Davos World Economic Forum in Switzerland this week, Kremlin adviser Arkady Dvorkovich admitted what many economists have suspected for months: Russia's economic growth has plunged since last summer, and next year's forecast is around 4 percent, half the rate of growth during President Vladimir Putin's first year. Mr. Dvorkovich added that, "We need to restore confidence in what the state is doing."

The news could hardly be worse for Mr. Putin. He came to power five years ago pledging to kick-start Russia's flagging Soviet-era economy through reforms and market-driven modernization. Instead, perceived bureaucratic abuses, especially the state takeover of Yukos - which Putin had sworn to prevent - appear to have deflated business confidence and triggered an exodus of desperately needed investment capital.

"We have no economic growth, despite extremely favorable external conditions," including the high price of Russia's main export, oil, says Anton Struche-nevsky, an economist with Troika Dialogue, a leading Moscow investment firm. "The economy is stagnating. The level of uncertainty is huge, and uncertainty means many investment plans get cancelled."

Putin's arrival in the Kremlin was hailed by many liberals, who said the stability and order he promised would liberate market forces to remake the economy. But Putin's increasingly tough rule seems to be leading to different results.

"We felt inspired [when Putin came to power], and hoped we could move ahead with politically stable authorities and a reform majority in the Duma," says Yevgeny Yasin, rector of the Higher Economic School in Moscow. "But now we see growing conflicts between the authorities and business. The window of opportunity is closing."

Yukos, once Russia's most profitable company, has been brought to the verge of bankruptcy by a barrage of back-tax bills totaling $29 billion. The company's founder, Mikhail Khodorkovsky, has been imprisoned for more than a year on charges related to illegal privatization and tax evasion, though many experts say he was singled out for prosecution on political grounds. Late last year, Yukos's main unit, Yuganskneftegaz - which pumps more crude daily than Libya - was sold in a closed auction, at a discount, to the state-owned oil firm Rosneft.

Russia's business community has recently been alarmed by similar, though much smaller, tax assessments launched against other companies, including the telecommunications giant VimpelCom and Japan Tobacco International. "These new tax claims demonstrate that someone in the state wants to demonstrate their reach into any sector of business," says Mr. Struchenevsky.

This week, Prime Minister Mikhail Fradkov announced a 25 percent increase in funding for the FSB, the former KGB security service, in part because the agency is needed to keep tabs on private companies. "We continue to require up-to-date information from the FSB that ... allows us to make decisions on levelling the playing field for competition, developing business, and creating an attractive investment climate," Mr. Fradkov said.

Some business people say attention from the authorities is seldom helpful or benign. "Bureaucrats are doing whatever they want," says Yevgeny, a private entrepreneur in the agricultural sector who didn't want his last name mentioned. "Unfriendly takeovers are increasing. If you're not 'protected,' you can lose your business." The best way to avoid all sorts of unexpected legal and regulatory troubles, he suggests, is to take on local officials as partners. Yevgeny says he isn't sure who's to blame but, "in Russia everything tends to start at the top and move downward."

Another factor fueling business unease is a pending official report on the 1990s privatizations by the Russian parliament's accounting chamber, due next month, which some fear might be used as a road map for further Yukos-style expropriations. Experts say that ferocious struggles have led to the report being inexplicably delayed three times while the chamber's head, Kremlin loyalist Sergei Stepashin, mysteriously resigned last month, only to be reappointed by Putin.

"There are forces who would like to use [the report] for their own purposes, and this has caused the postponements," says Igor Yurgens, vice president of the Union of Industrialists and Entrepreneurs, Russia's main big business lobby.

Mr. Yurgens, who says he's read "about 70 percent" of the still-secret document, insists the final version will blame bureaucrats and bad laws rather than businessmen for the quick-and-dirty sell-offs that transferred many of Russia's economic crown jewels into private hands at cut-rate prices.

But the liberal newspaper, Kommersant, which claims to have obtained a draft copy, says the report's main concern is to restore the state's property rights in disputed cases, and thus "could serve as the basis for the mass reevaluation of the results of privatization."

Despite the declining economy and rising turmoil in state-business relations, some still pin their faith on Putin. "I don't believe there will be any further Yukos cases," says Yurgens, who has met with Putin many times. "It's true that in our imperfect democracy, the role of the number one man is extremely important. But I am convinced that Mr. Putin's instincts are firmly on the side of the free market."