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ANALYSIS-Russia business climate still tough after BP deal
By Andrew Hurst

MOSCOW, Feb 19 (Reuters) - For many, Russia's image as a wild place to do business may never be quite the same again after British oil giant BP steeled itself and splashed out billions of dollars to buy a Russian oil company.

In a landmark deal, the British company announced last week it was buying a half share in Russia's third biggest oil company TNK for $6.75 billion. It is the biggest foreign investment in Russia in recent history.

Could it be that Russia, a country that lived through chaos in much of the 1990s and spooked foreign investors when its economy teetered on the brink of collapse less than five years ago, has quietly joined the ranks of normal trading nations?

The truth, say many financiers and analysts, is not so pretty -- Russian President Vladimir Putin still has to carry out some arduous reforms which could face strong resistance.

But with parliamentary elections looming later this year and a presidential election due in 2004, no one is banking on the government just yet taking an axe to a pettifogging bureaucracy that has defied reform since Tsarist times.

"It's the mother of all reforms. The most difficult and the most necessary," said an economist with an international organisation in Moscow.

Small entrepreneurs, Russian and foreign alike, without the punching power of large international corporations, remain plagued by regulations which give petty officials the power of life and death over many a venture.

In addition, Russian law courts are widely seen as being riddled with corruption and presided over by judges often suspected of taking bribes from the rich and powerful in return for a favourable ruling.

"Business people want a predictable environment and for that you need a good legal system. We feel that is not there," said a senior manager at a foreign company based in Moscow who asked not to be named.


Russia's stifling bureaucratic culture is nothing new. It was satirised by early 19th century writers like Nikolai Gogol, who savagely lampooned the fawning of ordinary provincial Russians over a man masquerading as a top official in a comic play "The Inspector General."

But while large companies such as BP have the financial muscle to cut through the bureaucratic jungle, small business people are not so lucky.

"A large company can afford to pay for all the licences you need but for a mom and pop store you are out of business before you have even started," said the senior manager.

Fears that Putin's government, which has cleaned up state finances, has lost its reforming zeal receded after the State Duma lower house of parliament approved a reform of the electricity industry on a crucial second reading last week.

The law is expected to receive a final seal of approval on its third reading scheduled for February 21.

"The Kremlin decided that energy sector reforms had to be initiated. They are clearly going to monitor them very closely," Niclas Sundstrom," an emerging markets analyst at Citigroup in London. "I think it's an important signal for other reforms."

The biggest worry for small and medium sized companies weighing up whether to invest in Russia were local bureaucracy and a chronically inefficient customs service. "It's the top complaint," said Sundstrom.

The government's three-year program for 2003-2005 has marked out excessive customs regulation, an inefficient judiciary and bureaucratic red tape as key areas for reform.

Putin himself highlights the importance of judicial reform in promoting his country to potential foreign investors.

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