Mother Russia at War with Herself

While Putin pushes business to look outward, he's supporting security bureaucrats who harrass, or even expel, foreigners. This won't work

By Paul Starobin

For three centuries, Russia has lurched between welcoming foreigners and keeping them out. Now comes an interesting anomaly: The country is pursuing both courses simultaneously -- and with potentially disastrous consequences.

On one front, Russian business barons are rushing to sign up world-class foreign executives to manage their sprawling conglomerates. And with doors opening to foreign investment, European retail chains such as Ikea are flocking to Moscow and other high-growth markets.

On another front, a Big Chill seems to have set in. Russian authorities recently told the U.S. Peace Corps to pull its operations out of the country. Citing vague national-security concerns, officials in December refused to allow the AFL-CIO's Irene Stevenson back into Russia, where she has lived since 1989. And a cumbersome new visa system had Ikea executives cooling their heels for weeks in Sweden, awaiting permission to enter the very same country that's supposedly trying to lure them in.


  At the center of clash is President Vladimir Putin, who oddly personifies both dynamics. Part reformer, part ex-KGB agent and superpatriot, Putin presides over the new open-market culture fostered by Russia's embrace of global capitalism, yet is allowing the country's vast security apparatus to proceed unchecked.

Having consolidated their assets after bruising privatization battles of the 1990s, Russia's commodity barons badly need foreign experts to bring their export-oriented businesses up to international standards. That way, they can attract capital on Wall Street and in Europe.

For example, the Russian stewards of a newly created aluminum giant, SUAL Holding, recently hired as its Moscow-based president a South African native, Chris Norval, previously the director of strategic planning at global mining giant BHP Billiton, based in Australia. "My interpretation is that Russia is opening," says Norval.

Yukos (YUKOY ), a huge Russian oil producer, has hired David Owen, the ex-British Foreign Secretary, as chairman of its international division. "Business is a way of moving Russia into a fully democratic, market-oriented world -- and it is happening," Owen says.


  Yet, post-Soviet Russia is still in the grip of the seemingly endless conflict in Chechnya, which energizes the government's antidemocratic bureaucratic culture. Unlike most Eastern European societies, Russia never truly reformed its Soviet-era security agencies, so their mindset and habits persist. They are control freaks, pure and simple. "In many, many aspects, we are still living in the Soviet Union," says Grigory Yavlinsky, leader of the liberal Russian party Yabloko (see BW Online, 11/13/02, "In Russia, "Nothing Is Debated").

This is not to underestimate a serious internal security threat, demonstrated horribly in October by the brief, bloody takeover by Chechen terrorists of a Moscow theater. Ordinary Russians are understandably scared. But zealous authorities are now pursuing a wider crackdown on dubious targets.

Take the Peace Corps, which has 27 volunteers in Russia assigned to teach English and business courses in the provinces. Nikolai Patrushev, chief of the Federal Security Services, the successor to the KGB, told the Russian press that the volunteers could be spies "collecting information about the sociopolitical and economic situation in Russian regions, about government employees and administrators, and the course of elections." Calling such allegations "completely groundless," Peace Corp Director Jeffrey Hay says "this is a lost opportunity for both sides." By Paul Starobin


  In the case of the AFL-CIO's Stevenson, Moscow office director of the U.S. AID-funded Solidarity Center, she apparently raised hackles by consulting with Russia's air-traffic-control union about a threatened strike. Impolitic, perhaps. But that hardly makes her a national-security threat. "I think it's important that the Russian government remember that travel goes two ways," Stevenson said from Washington, where she's cooped up in a hotel while she tries to get her visa back. "You cannot be calling for free travel for Russians in Europe while at the same time you're turning people away at the border who have visas."

Putin, the ex-KGB colonel based in East Germany during Soviet times, is contributing to the clash of cultures. He doesn't want Russia to turn its back on the world. With his support for such open-market policies as World Trade Organization entry, he's encouraging Russia's new capitalists to look abroad. Open-market advocates, such as liberal economic adviser Andrei Illarionov, have clout in this regime.

And yet, with his signature call for a strong Russian state, Putin has also installed ex-KGB officials -- the Chekists, they're called -- in prominent positions at the Kremlin and key ministries. The outbreak of a second Chechen war is a personal issue with Putin, an emotional touchstone revealing his own distrust of foreigners.


  After the terrorist operation at the theater, Putin met with media executives to discuss how to cover such events. Pointedly not invited was Boris Jordan, the U.S. citizen of Russian descent in charge of independent station NTV, whose relentless coverage of the crisis particularly angered the Kremlin (see BW, 02/03/03, "Reality TV in a Russian Boardroom").

Under rhetorical attack from Putin, NTV's owner, state-controlled Gazprom, fired Jordan on Jan. 17. The new steward of the TV station is a native Russian. The assault on NTV isn't just a serious blow to a free press. Russia is also starting to look capricious, which is never a positive for attracting investment.

Westerners aren't the only ones affected by the contradictory policies. At first, Moscow invited China's national petroleum company to participate in the government's recent auction of state oil company Slavneft -- then subtly urged it not to make a bid. Such mixed signals undermine Putin's No. 1 goal of putting Russia among the world's wealthiest nations.


  At the least, barriers to foreigners make it much more difficult for Russian businesses to operate. Take Moscow-based Alfa Bank, which has its own support staff dedicated to sorting out visa issues for the foreigners who make up half the bank's managerial ranks. "It just makes for additional costs and discomforts for them and everyone else," says Mikhail Fridman, chairman of Alfa Group, the bank's holding company.

Russia's ambivalence toward foreigners has strained the society since Peter the Great, who tried to drag his countrymen -- kicking and screaming -- into the rapidly modernizing Europe of the 18th century. But such tensions can be abated. The best thing Putin could do is try to settlethe Chechen conflict peacefully, depriving the security organs of their prime rationale for a crackdown. But he seems too stubborn to attempt this move. So look for more maddening swings from one pole to the other. And if you're planning a trip, apply for your visa early.

Starobin is BusinessWeek's Moscow bureau chief

Edited by Douglas Harbrecht

Before it's here, it's on the Bloomberg Terminal.