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Privatization Pitfalls

In a Moscow Times op-ed today, Liam Halligan, chief economist at Prosperity Capital Management, warns that even with Russia’s recently-approved privatization plan, the country’s investment climate leaves much to be desired:

Russia’s legal system, including its protection of property, remains weak, as illustrated by a case unfolding at our company, Prosperity Capital Management. It involves the nonpayment of hundreds of millions of dollars by an entity controlled by a member of the Federation Council.

Prosperity Capital Management, or PCM, has endured blatant legal abuses in its dealings with TGK-2 — one of the generation companies spun off during the wholesale privatization and restructuring of the country’s power sector after Unified Energy System was broken up in July 2008. The abuses are among the worst since the Yukos affair…

…President Dmitry Medvedev has made the fight against “legal nihilism” a priority, but our case shows that corporate governance risks remain high, even though the business environment has improved in recent years. As a result, many potential investors continue to be scared off.

This is a shame because Russia offers huge economic potential. Total consumer, corporate and state debt amounts to 50 percent of gross domestic product, compared with 300 percent or more in many Western countries. Russia contracted for the first time in a decade last year, but it has since bounced back, soaring by 5.4 percent during the first half of 2010. Commodities now account for 20 percent of national revenues, down from 40 percent in 2003. Russia also boasts a stock market that, while volatile, is underrated and capable of generating enormous shareholder gains.