In global capital markets, Russia eyes larger role

The investment push, fueled by a new sovereign wealth fund and eager Russian businessmen, has raised concerns of Moscow meddling abroad.

Under the leadership of CEO Dmitri Medvedev, Russia's state-owned natural gas giant, Gazprom, has rapidly expanded its operations around the globe and become one of the world's richest energy companies. It has also been accused of flexing its economic muscle for political gain.

Now, as President-elect Mr. Medvedev prepares to take Russia's helm in May, those twin distinctions could be bestowed on the country as a whole. Fueled by high oil prices and eager Russian businessmen, the former isolationist Communist-led superpower is poised to leap into global markets as a key strategic player and a major source of cash investment – which some fear could come with political strings attached.

Leading the charge is a newly created sovereign wealth fund. A Feb. 1 spinoff of Russia's $160 billion Stabilization Fund to protect against a downturn in oil prices, the new $32 billion fund is expected to start investing abroad this fall. Eventually, experts say, it could rival the global financial clout of oil-rich states such as Norway, Saudi Arabia, and Kuwait.

In addition, Russian companies are increasingly investing abroad – a trend encouraged by Medvedev, who has pledged to make Russia "one of the world's biggest financial centers" once he takes over from his mentor, President Vladimir Putin.

Barely a decade ago, Russia's economy was in tatters, best known for its astronomical rates of capital flight – up to $25 billion annually. But since Mr. Putin came to power eight years ago, a quiet turnaround has occurred that saw Russia take in a record $28 billion in direct foreign investment last year, according to state statistics.

Even more remarkable, outbound investments by Russian companies have grown from virtually zero a few years ago to almost $75 billion by the end of last year.

The best-known players so far are powerful energy firms like oil giant Lukoil, which runs a string of service stations in the US, and Gazprom, currently on an energy-infrastructure buying spree around Europe, Africa, and Asia. But hard on their heels, experts say, are Russian companies that are active in everything from automobiles to telecommunications.

"It's becoming common to see Russian brands entering other markets and doing well," says Alexander Ivlev, a partner at the global consulting firm Ernst & Young. "Russian companies increasingly come to advisory firms like ours with questions about other markets. It's becoming a very important part of their business."

In the run-up to Mar. 2 presidential elections, Medvedev said the Kremlin would encourage Russian companies to invest heavily in foreign assets. "The acquisition of foreign companies directly or by buying up stakes in their authorized capital is a very important task," Medvedev told an assembly of Russian businessmen in February. "Business should always be confident that it has state support [when it moves onto] world markets."

But is the world ready for an assertively capitalistic Russia? Some say no. In his annual assessment to Congress last month, US National Director of Intelligence Michael McConnell voiced "concerns about the financial capabilities of Russia, China, and OPEC countries and the potential use of their market access to exert financial leverage to political ends."

On a Persian Gulf visit last year, Putin lashed out at the US and other countries for "misplaced" fears of political penetration and the obstacles they create for Russian investors. Medvedev, for his part, has insisted that Russia's motivation is purely economic. The main reason for Russian investors to buy foreign firms, he says, is to "help retool and modernize Russian companies, boost their production effectiveness and enter new markets."

Some analysts suggest Russia's behavior will smooth out as it becomes more experienced. "Russia is a newcomer to this world of foreign investment and trade, and is only starting to devise its strategy," says Yaroslav Lissovolik, Deutsche Bank's chief economist in Russia. "At times it makes mistakes and does things that are not always seen as acceptable."

Soviet way of spreading influence?

But some experts believe a more old-fashioned political calculus might be at work, particularly since the Kremlin has exerted direct control over many of Russia's leading firms during Putin's tenure.

"People with a shade of the old Soviet mentality interpret foreign investment as the spread of Russian political influence," says Yulia Tseplayeva, chief economist at Merrill Lynch in Russia. "Some in government may have this outlook," she says.

Gazprom has frequently been accused of pursuing the Kremlin's political goals behind a screen of business concerns, as when it shut down gas supplies to Ukraine and Belarus over the past two years due to pricing disputes. Gazprom's pressure on Ukraine briefly evaporated last year when pro-Moscow prime minister Viktor Yanukovych took office in Kiev, but has resumed since West-leaning Yulia Tymoshenko won back the job in December.

Controversy also swirls around two huge Gazprom-funded pipeline projects, Nord Stream and South Stream, being constructed to bypass countries seen as unfriendly to Moscow, including Ukraine, Poland and the ex-Soviet Baltic states. Estonia, which last year angered Russia by relocating a Red Army war memorial, has been holding up the underwater Baltic Sea Nord Stream project, which is to deliver Russian gas to Germany, citing serious environmental concerns.

Last month Medvedev traveled to the Serbian capital of Belgrade in his capacity as Gazprom chairman, and signed a deal to build a 250-mile Serbian leg of the South Stream pipeline, intended to supply Russian gas to Italy. In addition, Gazprom-Neft, the oil wing of the Russian gas giant, will invest nearly a billion euros in Naftna Industrija Srbije, Serbia's biggest gas company. Critics charge the cash infusions are politically motivated. Medvedev admitted that he was using his visit to "express support for Serbia in connection with the illegal unilateral proclamation of independence by Kosovo."

A push from Russian companies

But some experts argue that Western politicians and analysts have it all wrong, and that the problem is not that the Kremlin is running Russian businesses, but the reverse. "When politicians like Medvedev advocate more investment abroad, they're just giving Russian companies what they want. In fact, many Russian firms see investments abroad as more attractive than the more difficult and complicated business of investing at home," says Boris Kagarlitsky, director of the independent Institute for Globalization Studies in Moscow.

"[Due to the oil boom] Russian companies these days have a lot of free cash, and this leads to a situation where this money is being spread around very aggressively," he says. "This what makes Russian investors a loose cannon in the world market today."