Power tussle hits Russian investment

FINANCIAL TIMES, By Catherine Belton in Moscow, 16.06.2011
Dmitry Medvedev is expected to tout the creation of a $10bn state-backed private equity fund and other measures aimed at improving Russia’s business climate. But for the hundreds of business leaders from Russia and beyond flocking to hear him speak at the St Petersburg economic forum on Friday, one issue will drown out all others.

All will be listening intently for any clarity on whether Mr Medvedev will seek to stay on as president for a second term.

With good reason. Mounting uncertainty over who will be the country’s next president is driving continued capital flight and stunting investment as political jockeying intensifies ahead of the presidential elections in 2012. “These are the most uncertain times since 1999 when [President Boris] Yeltsin began looking for a successor,” says Sergei Aleksashenko, a former deputy central banker.

Neither Mr Medvedev nor his predecessor, Vladimir Putin, the prime minister, still considered the country’s paramount leader, have ruled out a return to the presidency. Both have been stepping up efforts to court big business.

The president’s own chief economic adviser, Arkady Dvorkovich, this week stressed there would be “a continuity of policymaking” no matter who was president.

But Russians are struggling to decipher where power will lie and, largely, are voting with their cash. More than $60bn has been taken out of the country since September, despite record high oil prices.

At stake, amid the jousting between the conservative and more liberal wings of the Russian elite, is “the future model of the country”, says a senior western banker, who argues the emergence of a third candidate is still possible.

Mr Medvedev’s recent calls for a slate of liberal- leaning reforms and his moves to dismantle the system of state capitalism built under Mr Putin’s presidency have resonated with business. They have included ordering the removal of government ministers from the boards of state companies and other bids to improve corporate governance.

“The rewriting of the civil code, the ban on pre-trial detention of businessmen for economic crimes and the lowering of social taxes are all steps being made by Mr Medvedev that business supports,” says Igor Yurgens, head of a liberal think-tank advising the president.

But doubts remain over Mr Medvedev’s record on implementing any of his reforms. “Clearly Medvedev is a better fit figure from the point of view of his views. But we have been hoping for years that Medvedev would do something and I just don’t see it,” said Alexander Lebedev, the billionaire owner of London’s Evening Standard and the Independent.

The 2003 arrest of Mikhail Khodorkovsky, Russia’s richest man until he criticised Mr Putin, remains a cautionary tale. Unlike Mr Lebedev, most Russian tycoons have stayed away from openly supporting one candidate for the presidency over the other. “It is extremely dangerous to even think about this, never mind speak about it. And if they do, they are never going to speak the truth,” Mr Aleksashenko says.

Mr Putin could yet back keeping his prot?g? in power. But his return to the presidency would probably represent a bid for stability above any progress, businessmen and bankers say.

Of late Mr Putin has been seeking to broaden his own support among the country’s business elite by forming a “People’s Front” and touting efforts to improve the business climate such as creating an agency to support medium-sized businesses.

Russia’s shifting economic and political climate has presented some huge opportunities for the country’s business barons.

Mikhail Fridman, the Russian billionaire shareholder in TNK-BP, BP’s Russian oil venture, recently appeared to take advantage of the shift when he faced down a bid by BP to join forces with Rosneft, the state oil champion.

Just a year ago such a move would have seemed impossible because the chairman of Rosneft, Igor Sechin, the powerful deputy prime minister, had built a fearsome reputation as the embodiment of the Putin system of state capitalism.

But Mr Sechin’s influence was targeted in Mr Medvedev’s reform to remove ministers from the boards of state companies.

Oleg Deripaska, the metals tycoon, is meanwhile hoping Mr Medvedev’s corporate governance reforms will give him the edge in a battle for Norilsk Nickel, the world’s biggest nickel miner.

“Any big political power shift in Russia has a huge impact,” said the senior western banker. “The tycoons see risks and they see opportunities.”

With big state assets, including Rosneft, slated for privatisation in the coming years, “this is the one game in town”.