And the Payback for Putin?

Why he's is warming up to Bush despite wariness at home

With sufficient time and care, new shoots can take root in even the stoniest of soil. So it seems for the suddenly blossoming relations between the U.S. and Russia. There was President George W. Bush in the White House on May 13, announcing his agreement with Russian President Vladimir V. Putin for the two sides to cut their strategic nuclear arsenals by two-thirds. The following day, in Reykjavik, NATO's foreign ministers unveiled a U.S.-brokered pact to give Russia a major say on alliance decisions. And at the United Nations, the U.S. and Russia won unanimous Security Council approval of tightened military sanctions on Saddam Hussein's Iraq, once a close ally of Moscow. The Cold War really does seem to be over, at long last.

All this comes as a prelude to Bush's arrival in Russia on May 23 for a visit with Putin, starting in Moscow and moving to St. Petersburg. While some discussions, such as those on Russia's aid to Iran's missile and civilian nuclear programs, could be tense, the meeting is expected to reflect the strengthening personal relationship between the two Presidents. "September 11 was a decisive moment," says a senior Bush administration official, citing Putin's play for a new strategic partnership with the U.S. by signing up in the war against terrorism. It is even looking less likely that Putin will oppose a U.S. effort to oust Saddam Hussein in Iraq.

What Putin wants and needs now, however, is a real payoff for Russia's economy from his new political alliance with the West. Unless more is done to help Putin rebuild his impoverished and impatient country, a backlash could jeopardize what Bush and the Russian President have achieved. Putin's room for maneuver is slim. The Russian press is mostly sour on the new arms pact, seeing it as a kowtow to Washington. And in a recent poll, more than half of all Russians called NATO "aggressive."

Putin's top priority is the opening of the Russian market to the West for investment and trade. His aim, as his own modest slogan says, is to help his country "Catch Portugal," the European Union's poorest nation. On that score, the U.S. has done little to help so far. Since September 11, foreign direct investment has picked up slightly, but there's been only one major deal from a U.S.-based multinational--the Exxon Mobil Corp. decision to invest $4 billion over five years in the Far East Sakhalin-1 oil project.

Of course, the White House doesn't control the investment decisions of private U.S. companies. Still, on matters on which Washington can help, Putin has received scant relief as well. A dallying U.S. Congress has yet to act on Bush's call for removing a Cold War relic--the Jackson-Vanik trade curbs enacted when the Soviet Union refused to allow Jews to emigrate. "This demonstrates the double standards of the U.S.," says Anatoly B. Chubais, the reformer who now heads electricity monopoly RAO Unified Energy Systems. "It undermines trust."

Of course, big investment projects can take a while to come to fruition, and some deals are in the pipeline. A U.S. business source in Moscow says Boeing could unveil a project to build regional jets with Russian aircraft makers Sukhoi and Ilyushin during the Bush-Putin meeting. Portfolio investment from the U.S. may also soon rise. A 90-strong delegation of American fund managers and investment advisers visited Moscow in mid-May, lured by the 56% jump this year in Russia's stock market. They plan to up their stakes but still have concerns. "The trends are positive," says Michael J. Phillips, chairman of Frank Russell Co., a $70 billion fund. "But corporate governance is a problem, regulation is a problem, and banking is a problem."

That's too dour, some say. Economist Peter Boone, head of research at Moscow brokerage Brunswick UBS Warburg, says: "Russia is on the verge of having a very huge scale of foreign investment," with some 20% to 40% of Russian industry going into foreign ownership over the next 5 to 10 years. Boone, an outspoken bull, bases this startling prediction on the productivity improvements Russian conglomerates are wringing out of assets they bought for a song. Boone figures the Russians soon will start taking profits out of their spruced-up companies by selling stakes to the West. Then, too, Russia could benefit from a new pact between Bush and Putin under which Russian defense companies may help build a U.S. missile defense system. Putin has even offered NATO the use of Russian designs to help build a European air defense system.

Such projects could help Russia if its economy--now largely based on oil--continues to slow. Right now, a mini-boom linked to high oil prices is sputtering, with the economic growth rate of 9% in 2000 likely to dip below 4% this year. Some 40 million still live below the poverty line. At $1,800, per-capita gross domestic product trails not just Portugal but Turkey and Hungary, too. The U.S., at $36,500, is galaxies away.

Putin needs help, fast. For the West's purposes, this pragmatic leader could be as good as it gets for a chronically troubled country ruled in the past by the likes of Ivan the Terrible and Stalin. If Putin doesn't get a greater return on his policy of rapprochement, the West could lose a golden opportunity to bring Russia into the fold.

By Paul Starobin, with Catherine Belton, in Moscow

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