A Little Logic, Mr. Putin

It's a pretty compelling story: Russia's President Putin is clamping down. He's reasserting the state's authority over key sectors of the economy while making sure that Russia's prized national assets aren't gobbled up by foreigners. And if you want to do business in Russia, you had better pay your taxes, too. Foreign investors may bicker, but there's a clear logic to it all.

If only this party line about Putin's rod of iron were true. Foreign investors in Russia would at least understand where the Russian leader is coming from. No one denies Russia has the right to impose limits on foreign investment to ensure strategic national interests. But closer inspection reveals far less logic to Russia's current policies. Instead of laying out clear rules, investors are told that their capital is welcome, only to discover at a day's notice that they can't bid. New regulations concerning investment in natural resources have been vaguely drafted, giving even more arbitrary power to bureaucrats.

Sadly, this has little to do with central control, the authority of the state, Russia's sovereign rights, or its national interests. It smacks of chaos. Russia's leaders may well believe that, with a strongly growing economy and large revenues from oil, they can dictate whatever conditions they like to foreign investors. Indeed, recent foreign direct investment figures show that foreign companies are keener than ever to expand into Russia, a large and attractive market. Yet Russia still scores poorly when its investment levels and returns are compared with other countries. And its growing wealth has been driven largely by oil, a commodity that requires huge up-front investment -- often foreign -- to bring to market. This year, in no small part thanks to Russia's unstable investment climate, Russian oil production growth is forecast to plummet dramatically.

That should be a wake-up call. Perhaps when Russia outscores the world economically it can afford to thumb its nose at foreign capital. But as long as its local investment is low, its economy overdependent on oil, and its international image in need of a makeover, President Putin must fulfill his promise to create "transparent and predictable conditions" for business.

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