Liberals Call for Friendlier Face Abroad

ReutersFinance Minister Alexei Kudrin addressing the audience during an investment conference held at the Gostiny Dvor conference center on Wednesday.
Two of the country's top liberal government officials broke ranks with the Kremlin on Wednesday, calling for a change in the country's increasingly strident foreign policy to ensure a stable platform for investors.

Finance Minister Alexei Kudrin, the deputy prime minister in charge of economic policy, told an investment conference in Moscow that the government "should adjust [its] foreign policy goals in the nearest future to guarantee stable investment."

Kudrin's comments were amplified by Anatoly Chubais, head of state utility Unified Energy System, who criticized Kremlin foreign policy more directly.

Amid the growing instability on global financial markets, the widening diplomatic spat between Moscow and London over the British Council was potentially damaging to business interests, as foreign investment is more crucial than ever, Chubais told the conference, which was organized by Troika Dialog.

"Of course, we can continue to fight the British Council further," he told the conference. "But how much does this foreign policy cost Russia?"

He added that, as the situation on global markets continued to worsen, the country could no longer afford to alienate its foreign partners and lose business opportunities.

Russia's relations with the West have been battered by a series of high-profile spats, including bitter disputes over U.S. missile-defense plans in Europe and the sovereignty of Kosovo.

Diplomatic relations between Russia and Britain, which have been severely strained since Moscow refused to extradite Andrei Lugovoi to face charges in the murder of former KGB officer Alexander Litvinenko in London, are arguably at their lowest point since the end of the Cold War.

As well as the political rifts, Western governments and investors have expressed concern over the Kremlin's increasingly assertive energy policy, which has seen British-owned oil majors Shell and BP pressured into ceding control of large energy projects to Gazprom.

Russian officials and business leaders have largely refrained from openly criticizing the government in the run-up to March's presidential vote.

President Vladimir Putin has endorsed First Deputy Prime Minister and Gazprom chairman Dmitry Medvedev as his preferred successor, effectively ensuring Medvedev's victory in the March 2 poll. Investors have welcomed the prospect of a Medvedev presidency with Putin as prime minister, arguing that it would ensure much-needed stability for investment.

Kudrin said Putin's agreement to serve as prime minister could only bolster the country's economy. "Putin's desire to remain as premier is a very serious stabilizing factor," he told a packed audience of businesspeople in the Gostiny Dvor conference center.

A week after the World Economic Forum in Davos, Switzerland, where global leaders discussed the growing financial crisis on global markets and the prospects of a U.S. recession, Kudrin reiterated the fundamental robustness of the Russian economy.

Foreign direct investment reached $47 billion in 2007 alone, the ninth-straight year of growth, Kudrin said. He also raised his estimates for economic growth, saying that the country's economy had grown about 7.8 percent in 2007 and was expected to grow at a rate of 6.5 percent to 7 percent over the next three years.

On the flip side, inflation spiraled out of control toward the end of last year, hitting 11.9 percent, way beyond official targets. Faced with the prospect of popular discontent, the authorities lowered grain export duties, and urged food wholesalers to commit to a price freeze.

Economists speaking at the conference urged Russia not to be complacent. Varel Freeman, vice president of the European Bank for Reconstruction and Development, said, "The economy is not on autopilot.

"Banks are not immune to contagion -- the price of credit has increased, the availability of liquidity has gone down and people who have liquid resources will invest them in high-grade opportunities," he said.

Another speaker at the conference, former Costa Rican president Jose Maria Figueres, argued that Russia was focused on short-term solutions.

"Just as I feel very bullish in the short term, I feel very bearish on the long-term," he said. "The Russian economy is based mainly on oil and gas, and has fundamental challenges down the road."

Among those challenges, he said, are a dwindling population, poor health, a lack of infrastructure and an underdeveloped education system.

His comments were echoed by Joschka Fischer, former German vice chancellor under Gerhard Schr?der, who urged Russia to invest in a knowledge-based economy, and move away from its reliance on the extractive industries. "You can build an economy on natural resources, but ... modern economies are built on human resources."

Russia has made much of its natural wealth, boasting some $160 billion accumulated in the stabilization fund from excess oil revenues. As of Friday, the stabilization fund will be split into the Reserve Fund and the National Welfare Fund.

Kudrin reiterated the government's commitment to investing some of that wealth into financial markets. The National Welfare Fund would have some similarities to a sovereign wealth fund, a concept that has attracted widespread criticism in recent months over fears that some governments could use the funds as a political tool.

The official in Kudrin's ministry who was until recently in charge of the stabilization fund, Deputy Finance Minister Sergei Storchak, remains in pre-trial detention on fraud and embezzlement charges. Investors have expressed concern over Storchak's continued detention, seeing in the case a possible threat to Kudrin's position and to his policy of using the Stabilization Fund to hedge against drastic falls in global demand for oil and gas.

As Western economies start to falter, Kudrin said, opportunities are emerging in the East. The move by Asian lenders to come to the rescue of Wall Street banks Citigroup and Merrill Lynch will be a stabilizing factor, Kudrin said, as the shift in economic power moves from West to East.

"Money that can't be used in our economy will be taken out and placed [elsewhere]," Kudrin said.