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Commentary: Reform Key to Growth in Russia

The Russia Forum, held in Moscow each February, brings together politicians and business leaders to discuss investing in this vast resource-rich country.

Vladamir Putin
Bulent Kilic | AFP | Getty Images
Vladamir Putin

Two problems with this:

1. Moscow in Feb is -30 degrees Celsius and I need my fingertips.

2. There was $85 billion in capital outflows last year and Russia needs investment.

Much of the investor panic is political.

In next month's presidential election, Prime Minister Vladimir Putin aims to return to power. Two terms as president from 2000 to 2008 and a further four years as prime minister, never far from President Dmitry Medvedev's elbow, wasn't enough. Putin wants a full 16 years in power.

But the middle classes and entrepreneurs are restless.

December's parliamentary election was dogged with allegations of vote rigging. Subsequent protests have attracted global attention and another protest is planned for Feb 4.

Sure, gross domestic productgrew 4.3 percent last year, but things are already looking tougher for 2012.

This political uncertainty in itself is worrying enough to investors, but what's more, business needs the regime on side to bring the reform required to support economic growth.

Even those at the heart of the system have told CNBC they agree.

Andrey Sharanov, Deputy Mayor in charge of Moscow's economic policy, told me that mending the court system and enforcing the rule of law is crucial to his goal of making Moscow a financial hub. He also wants to see more innovation.

Bank of Russia Deputy Governor Alexei Ulyukayev told me, very frankly, that property rights must be assured to tempt foreign investors.

But it's political support on more practical matters that's on the minds of business leaders, like the CEOs of Cherkizovo, Russia's largest integrated meats company, and Russian agri-industrial busness Sodrugestvo.

These men between them oversee revenue of $4 billion and told me they want roads, railways and ports. But that's infrastructure the government is failing to provide.

Here's another political concern for investors: state capitalism.

No longer do companies report directly to ministries, but increasingly the government wields power over corporate Russia through massive shareholdings in the likes of Sberbank , Gazprom and Rosneft .

State-owned enterprises account for over 60 percent of the market capitalization of the Russian stock market and about a third of total GDP. The government holds golden shares in 181 companies.

And Putin continues to stand by his model of state capitalism. Just this week he said it's the job of government to finance innovation because private enterprise fails to do so.

But few governments have a glowing record of harnessing innovation and that model doesn't lure western investors.

Still, it's ok because Russia is a BRIC country and the BRICs are the future. Right?

Wrong.

When I caught up with renowned ecconomist Professor Paul Krugman here in Moscow he said Russia just doesn't fit with the BRIC countries. It's just a plain old hydro-carbon economy.

Oil andgas account for 20 percent of GDP and 60 percent of exports. (NB oil prices have risen fivefold since Putin came to power, which in no small part aided his continued popularity at home)

Without growth and diversification, says Krugman, we'll wake up in 30 years and wonder why Russia is still just pumping oil and hasn't taken off.

Here's another big difference to the other BRICs: the population is shrinking and life expectancy has actually declined. The average life expectancy for a Russian male languishes in the 50s. As well as the human cost, this means a dwindling and ailing workforce and consumer base. Not a great growth story.

And we haven't even started on paralyzing bureaucracy and pervasive corruption. Add to that the fate of Russia if things get worse for the euro zone.

Frankly the biggest headache is just that everything in Russia is so complicated.

For instance: the restaurant opposite our hotel has an extensive menu of wine and vodka. Coincidentally the producer and I have an extensive appetite for such things (in moderation, of course.) Except the licenses run out in January and are rarely renewed until March.

A missed opportunity to relieve British visitors of their roubles .

And a personal liquidity crisis for me.

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