Medvedev's Russia still tricky for business

Here is a good Russian fairytale. Once upon a time a huge country ended decades of political and economic isolation. After some rocky years, a stable and pro-business government took over.

Oil prices rocketed, living standards soared and everybody made lots of money. Risks were high, but rewards much higher. A few nitpickers and naysayers complained about human rights, but nobody listened to them. The clever foreign investors who saw what was really going on lived happily ever after.



That, roughly, is how most businesses see Russia, as Dmitri Medvedev prepares to succeed Vladimir Putin in the Kremlin following last week's farcical election. Gone are the days when business life was simply about getting raw materials out of the country as fast as possible, or consumer goods in. It would be far too early to say that Russia is a normal European country. But for a big chunk of the population it is increasingly looking that way.



Sophisticated markets are developing in residential property, personal finance, insurance and construction. The bureaucracy may look nightmarish but no worse than in other emerging markets. It is even possible to dismiss the highly publicised disasters encountered by energy giants such as BP and Shell.



These companies struck highly advantageous deals in the 1990s when Russia was in no position to bargain hard. Now the tables have turned, and it is no longer possible for foreign energy firms to have controlling stakes in the crown jewels of Russia's energy reserves such as the gas fields in Kovykta in Siberia, or Sakhalin in the far east. BP and Shell respectively have been forced to cede majority stakes, worth billions of dollars, in these projects.



The bureaucratic harassment, alleging phoney environmental and contractual infringements, was outrageous in one sense, but many would regard the outcome as a kind of rough justice.



All that is true, but not the whole truth. The real point about Russia is that it is in a different category from the other emerging markets, Brazil, India and China, with which it is commonly lumped together. It is not just that it is the smallest, and with the worst demography (every minute roughly four Russians die and only three are born). Nor is it the clogged infrastructure or difficult climate.



The real problem is that Russia lacks the rule of law, and the politics necessary to build it. One symptom of that is the continued imprisonment of Mikhail Khodorkovsky, the founder of the Yukos energy giant, once Russia's trophy example of western-style management and shareholder value. He was jailed after a show trial and his company-bankrupted. But that is just the tip of the iceberg.