A V Rajwade: Russia: Business and politics

WORLD MONEY

Winston Churchill described Stalinist Soviet Union as a "mystery wrapped in an enigma". Recent signals from President Vladimir Putin's Russia are no less confusing.

If its recent stance vis-à-vis Britain after the latter gave asylum to Boris Berezovsky, an "oligarch" (like Mikhail Khodorkovsky of Yukos "" see below) and Ahmed Zakaev, a Chechen separatist leader, is reminiscent of cold war rhetoric, the withdrawal of many free social services to the elderly smacks of a "rightist" turn to policy.

Even as critics accuse him of wanting to reconquer the "commanding heights of the economy" (originally, Lenin's phrase), Putin offered to sell the government's stake in an oil company to ConocoPhillips in the interest of closer relations with the US oil industry.

But perhaps the case that has attracted most attention is that of Mikhail Khodorkovsky, the controlling shareholder of Yukos, the giant Russian oil company, and one of the original "oligarchs"' who became obscenely rich in the mid-1990s.

At the time, a dozen businessmen lent money to the cash-strapped government of President Boris Yeltsin; on default, shares in public sector companies were sold to the businessmen at fire-sale prices, in return for waiver of the loans. It was a scandalous arrangement, its saving grace being its transparency! Khodorkovsky got Yukos, one of the world's largest oil companies, for barely $ 300 million as part of the deal.

In 2000, Yeltsin retired, and was replaced by his protege Putin, an altogether different person from the boorish drunkard that Yeltsin was. Putin made a deal with the oligarchs "" keep the assets, but obey the law in future and keep away from politics.

Most of the oligarchs kept to their part of the bargain, but apparently not Khodorkovsky. His TV station was blatantly anti-government, and he could and did influence Russian Parliament. In the process somewhere, Khodorkovsky crossed the limit. The empire struck back, slapping a tax bill for $ 3.4 billion on Yukos, and arresting Khodorkovsky for tax evasion and fraud.

The case was decided last month, and the government may sell Yukos's assets to satisfy the tax claim, crippling the company. Yukos produces a million barrels a day and the possibility of its production being affected is one of the reasons for the current high oil prices. Khodorkovsky is also expected to be given a prison sentence.

But to come back to the sale of state companies at dirt cheap prices: should the state now attempt to reverse the fraudulent sales? Back in 1995, Anatoly Chubais, the author of the shares-for-loans programme, acknowledged that "they are stealing absolutely everything. But let them steal. They will then become owners and decent administrators of this property".

Perhaps Chubais agreed with Keynes: "Avarice and usury...must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight."

In a way, the moral issue of where lies the "larger good" in this case is somewhat parallel to the argument advanced by Arun Shourie some time ago: circumventing bad regulation is justifiable and serves the common good.

Philosophical arguments apart, there is a practical angle: one should not go too deep into the origins of wealth. The source of many, subsequently respectable aristocratic fortunes in the UK lay in the fact that one of the ancestors had slept with the monarch and was amply rewarded for her accommodating nature. (I owe the thought, but not the wording, to one of John Kay's columns in the Financial Times.)

But whatever happens to Yukos, Russia is likely to continue to attract the foreign investor, at least, in the energy sector. Apart from the giant western companies, Japan and China are keen to exploit Siberian oil and gas.

The evident popularity of Russian paper, represents a spectacular turnaround in investor sentiment after the defaults in 1998 on both domestic and international debt. The default also led to a sharp devaluation of the rouble, helping economic revival by making domestic industry much more competitive.

The industrial revival and the sharp increase in the price of oil, Russia's principal export, has brought about a reasonable balance in the fiscal situation. Salaries and pensions are being paid on time and the barter system that had dominated economic transactions in the 1990s, has come to an end.

Some numbers are worth quoting: real GDP growth was 6.8 per cent per annum over 2000-03 (minus 0.1per cent over 1996-99), fiscal balance 2.2 per cent (minus 5.8 per cent) of GDP, and current account surplus of 11.6 per cent of GDP last year. Reserves of foreign exchange are around $ 100 billion. The per capita income growth is higher than GDP growth as population has kept falling.

This all-round improvement has led to Russia's inclusion in the four fastest-growing large economies (BRIC "" Brazil, Russia, India and China) over the next 50 years.

A Goldman Sachs research report last year predicted that the six largest economies in 2050 will consist of the BRIC, the US and Japan. But, 2050 is a long way off and much can happen in between!

Email: avrco@vsnl.com