EU Official Says Russia Faces Big Challenges

Russia must overcome significant challenges if it is to hold on to its rapid growth rates, economists and investors warned Tuesday.

Worsening corruption, comparatively low levels of foreign direct investment and a failure to diversify away from the energy sector threaten to derail the country's impressive growth rates, said Marc Franco, head of the European Commission's delegation to Russia.

"If something goes wrong, the Russian growth machine might well grind to a halt, or even reverse," he said at a conference organized by the Association of European Businesses in Russia.

Prime Minister Vladimir Putin has pledged to propel Russia into one of the leading six global economies by 2020. Basking in its self-proclaimed status as an "island of stability" in the midst of the global financial crisis, which many predict will push developed economies into recession, Russia has enjoyed annual economic growth averaging more than 7 percent over the past eight years.

But the country's investment image has been tarnished by evidence of corruption and state pressure on private business, while the bulk of foreign investment continues to roll into the natural resources sector, leaving the country vulnerable to fluctuations in the oil price.

On Monday, President Dmitry Medvedev said he would head up a national effort to combat corruption.

Some economists said the country has achieved impressive growth at the expense of other considerations.

Chief among these is spiraling inflation, which economists have identified as the single biggest challenge faced by Medvedev's new administration.

"It's uncertain how long the government can afford these growth rates," said Yevgeny Gavrilenkov, chief economist at Troika Dialog.

He said the state's lavish spending program, targeted at investment into flagging infrastructure and raising state sector salaries, has been one of the major drivers of inflation, which topped 14.3 percent year on year in May.

Whether the government should continue to seek high growth rates has been at the center of debate within the government, with Finance Minister Alexei Kudrin advocating slower growth amid signs that the economy is overheating. But it is a stance that has attracted little support within the Economic Development Ministry, which is loath to put the brakes on economic expansion while oil prices are high. "This talk of overheating comes from those who sit within the Boulevard Ring," Deputy Economic Development Minister Stanislav Voskresensky said Tuesday, speaking at the same event. "If you leave Moscow, you will see total underinvestment in the Russian economy. ... Overheating may exist in one place, but that is Moscow."

Others urged the debate out into the open, arguing that the outcome of the conflict in government would determine the role of Russia in the global economy.

"It is very difficult because the public discussion is not there, because democracy does not exist in this sense of the word," said Renaissance Capital vice president Igor Yurgens, who also heads up the Institute of Modern Development, a think tank created recently at Medvedev's behest to encourage independent thinking. A small group of individuals make decisions behind closed doors on subjects that would benefit from a national debate, Yurgens said.