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FT’s Big Russia Friday

The Financial Times is having a big day on Russia.

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Runners approach the starting blocks

“As soon as Mr Putin says candidate X or Y should be president, he becomes a lame duck, because the whole Russian elite will immediately orientate themselves around that person,” says Alexei Makarkin of Moscow’s Centre for Political Technologies. “Mr Putin’s favourite style is to make it impossible for any expert to foresee his decision before it is announced,” says Nikolai Petrov of the Moscow Carnegie Centre, adding that a third name could well emerge. … One intriguing possibility is that Mr Putin might let two officially-endorsed candidates battle it out in the election. That could parallel the party rivalry between the pro-Putin, centre-right United Russia party, which dominates the Duma, and the recently-created centre-left – but also pro-Putin – Just Russia party. Political scuttlebutt in Moscow suggests the emergence of a second pro-presidential party may not simply be, as critics say, an attempt to create fake political competition. Rather, the two parties may be loosely tied to the two Kremlin clans.

The state’s unsated appetite

The kowtowing has underlined the new subservience of foreign oil majors seeking a place in Vladimir Putin’s new energy order, which for many industry observers began with the smashing of Mikhail Khodorkovsky’s Yukos oil company over back tax claims. The humility has taken such a hold that when Gazprom took over Royal Dutch-Shell’s Sakahlin-2 oil and gas venture last November after a crushing government campaign, Jeroen van der Veer, Shell’s chief executive, enthusiastically thanked Mr Putin for his support.

Toughened Russia limbers up

The Kremlin generally keeps the more radical hawks at bay. It knows that, despite Russia’s recent economic recovery, it is still too weak to compete all-out politically, let alone militarily, with the US. Russia’s defence budget is only about 5 per cent of the US’s and most of its weapons date back to Soviet times. Fyodor Lukyanov, a liberal foreign policy analyst, says: “Putin definitely does not want a general confrontation with the west.” However, with the presidential election looming, Kremlin officials may need to respond to increasing nationalism. Konstantin Kosachev, Mr Margelov’s counterpart in the Duma, parliament’s lower house, said in a recent FT article: “Russian politicians’ room for manoeuvre will be limited. Most Russians are disappointed by what is happening in their region and the explanation most commonly heard is that Russia is too soft. Any politician who is not tough risks losing support.”

Diversification is elusive key to success

But it will be a long hard slog. First, following the price increases of the early part of the decade, the share of oil and gas has risen to around 25 per cent of GDP and 65 per cent of exports. While the Russian economy is far stronger than when Mr Putin took power in 2000, it is also even more reliant on hydrocarbon production. Second, the strength of oil and gas exports puts upward pressure on the rouble, hurting the competitiveness of other sectors and threatening Russia with so-called “Dutch disease”. Oil and gas revenues flowing through the economy are driving up prices, including wages. The authorities have worked hard to reduce inflation over the past decade but it still stood at 9 per cent at the end of 2006.

Igor Yurgens: Approach that is globally acceptable but better suited to home

Some actions by the Russian state have damaged the country’s image – sometimes unnecessarily. The Yukos case was a tragedy which could have been tackled differently. But in the cases of Gazprom’s treatment of Ukraine and Belarus, or Royal Dutch-Shell and the Sakhalin-2 project, sometimes I think there is a cultural gap between Russia and the west. In the substance of most of those conflicts, I would say the Russians were right. But the way things were explained to the outside world was clumsy, and the behaviour sometimes appeared uncivilised. Gazprom is now hiring public relations experts, which shows they understand things need to be rectified. Russian companies undoubtedly have a reputational problem. Inside the country, the population still questions the legitimacy of some acquisitions of huge wealth, concentrated in some big groups. So why should public opinion in the west not also question that?

Muscovites move to trendy suburbs

Another factor driving the out-of-town housing boom is that for the first time banks are offering Russians mortgages on affordable terms. Outstanding mortgages make up 1 per cent of Russia’s gross domestic product, compared with 30 per cent in Europe, says Mr Nash. But the Russian figure is increasing by 150 per cent each year. “It’s growing phenomenally quickly,” he says. Availability of mortgages will have an impact on the economy far beyond housing because it gives Russians a mechanism for enlarging their wealth. “Once you can get access to mortgage markets you can obviously borrow on your increased wealth and . . . you bring forward future income streams by doing that in a country where it has been impossible to do that in the past, realistically,” says Mr Nash. “You have access to funds at last.”

REGIONAL PROFILE: SOCHI

Greenpeace and other environmental groups protest that the economic benefits will favour big companies such as Gazprom at the expense of smaller businesses. Not so, say Sochi city officials. They estimate that half the future tax revenues from Krasnaya Polyana will come from small and medium-sized companies, including hotels and restaurants. Mr Nadiradze insists that he is not building a resort just for Russia’s wealthy elites, but for everybody. “We are planning for all levels of the population.”