Grabbers without borders

Criminal prosecution of Yukos drags down European economic performance

Yesterday, banking group Institute of International Finance (IIF) released a report predicting that the deterioration of the business climate in Russia, caused by the Yukos affair, will lead to a further slowdown in economic growth throughout Central and Eastern Europe. According to IIF estimates, the total GDP of the region's countries will grow by 5% in 2005 versus 6.2% in 2004. And, apparently, the process will continue. Banking group experts believe that the recovery in demand in the eurozone should support an increase in growth rates in Central and Eastern Europe, but the deterioration of the business climate in Russia will provoke a slowdown in economic growth to 4.5% in 2006.

Since multibillion-dollar tax claims were brought against Russia's once largest oil-producing company and the arrest of Mikhail Khodorkovsky in the fall of 2003, only the lazy have not spoken about the negative impact of the YUKOS case on the performance of the Russian, and now European, economy. Many experts are confident, for example, that it was the attack on Yukos that provoked a surge in capital outflow from Russia in the third quarter of 2003 after an unexpectedly prosperous first half of the year. Let us recall that the net outflow of private capital amounted to $7.7 billion in the third quarter of 2003, while in the first two quarters an influx of $3.9 billion was recorded. And it was precisely the indicator of that quarter that put an end to the government’s hopes for the first time in history. post-Soviet history of Russia to report on the “turning of the rivers” of capital: at the end of 2003, the outflow amounted to $2.3 billion. However, some experts did not agree with this conclusion, noting that the reason for the outflow of capital was allegedly not the arrest of Mikhail Khodorkovsky, but a change in developing countries benefit from the situation on global financial markets.

Be that as it may, in 2004 the Russian economy remained unattractive for investment. According to the Central Bank, in 2004 the net outflow of private capital amounted to $7.8 billion. This year the situation has not changed yet: minus $1 billion in the first quarter. Russian officials, not to mention independent experts, are unanimous in their assessment: it has not yet been possible to create a climate favorable to investors. As a consequence, there is a decrease in the level of foreign investment (according to Rosstat, in the first quarter, the Russian economy received $6 billion of foreign investment, which is 2.4% less than in the same period last year), and the rate of economic growth.

A “shortfall” in GDP growth percentages is predicted by all the world’s leading financial and economic centers. The day before yesterday, the European Bank for Reconstruction and Development (EBRD) reported that, according to its estimates, Russia's GDP will increase this year by only 5.2% versus 7.1% last year. And yesterday the Organization for Economic Co-operation and Development (OECD) released its forecast. Its experts believe that the Russian economy will “grow” by 6% in 2005. “It seems that the slowdown (in growth rates - Ed. ) is mainly due to the deterioration of the business climate due to the actions of government authorities. Investment growth has slowed and capital flight has become more significant in the context of growing uncertainty about ownership and other aspects of business operations,” the organization's report says. According to its authors, “the serious deterioration in the business climate over the past year is due to various factors: legal disputes surrounding the Yukos oil company, the authorities’ insistence on strengthening control over sectors they consider strategic, and the increasingly contentious and offensive position of the tax administration.” In addition, experts are unhappy with the slowdown in structural reforms.

The report's authors criticize the government for moving toward short-term fiscal measures to boost domestic demand instead of restoring the business climate and promoting reforms. However, such measures “raise questions about the quality and sustainability of growth in the medium term, as well as the reliability of fiscal policy as a whole,” OECD experts write.

The Russian government must upset the growth forecast not only for GDP, but also for inflation. According to OECD estimates, by the end of 2005 it will be 13%. It seems that from a distance there is no way to discern the chances of containing the rise in consumer prices at the level of 10%. The head of the Ministry of Economic Development, German Gref, spoke to Vladimir Putin about the existence of such chances last Friday.

Mikhail VOROBYEV