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Russia: Pulling down the curtain again

Times Online
The Times
July 10, 2008

Pulling down the curtain again

In the view of the Kremlin, some investors are more equal than others. Russia is not alone in wanting to restrict foreign ownership in strategic industries but few nations could compile a list of 42 strategic sectors including almost every natural resource, including fisheries as well as television and radio broadcasters.

As with everything Russian, the timing of the announcement, immediately after the President’s showdown with Gordon Brown at the G8 summit is important. The restriction on foreign investment plays well to the gallery and the market regulator’s edict will tell Russian voters that the new President is taking a tough line against foreign carpetbaggers.

The big question is what it might do to the Russian economy and those with significant stakes in Russian businesses. These are in theory protected as the legislation is not retrospective. But anyone with a big stake in Russia will immediately see the potential market for that investment shrink.

Not all of the disappointed investors will be foreign as Russian entrepreneurs, too, will find buyers for their businesses fewer and those willing to venture more cautious in their valuations. Perhaps this helps to explain the position of the oligarchs currently battling with BP for control of TNK-BP. Who wants to be in a minority position when the potential buyers of your interest are limited to two state-controlled entities?

Foreign direct investment in Russia is not looking so healthy, with a 30 per cent decline in the first quarter of the year against the same period in 2007.

The severe restriction on investment in oil has been in place, unofficially, for at least two years. Its effect is already showing with Russian oil output stagnating and that is contributing to the present high oil price.

The Kremlin’s nationalist investment policy will do more than just hinder the development of the domestic Russian economy. Its impact will be felt worldwide.

In part, this move is an attempt to regulate the direction of investment. Russia wants to diversify its economy and build activity in areas such as consumer manufacturing and services.

Indeed, Mr Medvedev wants Moscow to become a financial market for Eastern Europe with the rouble its reserve currency. It is a noble ambition but someone has forgotten to tell the President that markets need participants and it helps if the door is open.

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