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Russian defense minister urges Americans to disregard "alarmism" and invest in Russian economy

Published by The New York Sun on 2005-01-14

The defense minister of the Russian Federation, Sergey B. Ivanov, last night urged Americans to ignore "alarmist warnings" and invest in what he characterized as his country's "burgeoning economy."

"We are definitely seeking greater economic cooperation with the United States," Mr. Ivanov told The New York Sun in a brief interview after a speech at the Council on Foreign Relations. "Definitely."

Asked in what sectors he sought more investment, the 52-year-old Mr. Ivanov said: "High-tech, intellectual property, knowledge-based industries, energy, automobiles, defense industries."

Earlier, during a question-and-answer period following his 30-minute address, the former diplomat defended the nationalization by the Russian government of Yukos, the giant oil conglomerate whose head, Mikhail Khodorkovsky -- one of the world's wealthiest men --was arrested in 2003 on charges of fraud and tax evasion. The government of President Vladimir Putin said that Yukos owed nearly $28 billion in taxes.

"What the government did was in perfect accordance with Russian laws," Mr. Ivanov said. "The government secured its economic interests in a legitimate manner."

The government's Russian Federal Property Fund subsequently put Yukos's biggest unit, Yuganskneftegaz, on the auction block, a move that Mr. Khodorkovsky and his associates bitterly opposed, asking a federal court in Houston for an injunction staying the auction. The Putin government, claiming that the Houston court had no jurisdiction over an internal Russian matter, went ahead with the auction. Last December 9, a shell company owned by Yukos's rival, Rosneft, bought Yugansk for $9.3 billion, an amount that Yukos officials said was less than half of what the company was worth. Rosneft was then folded into Gazpromneft, a government-dominated company that originally wanted to bid for Yugansk. Yugansk produces 1 million barrels of oil a day, or more than 60% of the oil lifted by Yukos each day.

Yesterday, the Oil and Natural Gas Corporation of India (ONGC) said that Rosneft had offered it a 15% stake in Yugansk. But Yukos officials, who are already seeking $20 billion in damages from the Putin government, responded by saying that they would sue ONGC if it accepted the offer. India and Russia have traditionally enjoyed close economic and military relations. In recent years, however, New Delhi has inched closer toward Washington as the Bush Administration began shedding the longstanding American wariness of India's socialist record in view of the Asian country's economic liberalization programs and openness to foreign investment in its market of 1.2 billion people.

When Mr. Ivanov was asked by The New York Sun about widespread concern that the Putin government's move against Yukos was motivated by the politics of personality, he seemed to shrug off the question. Prior to ordering the arrest of Mr. Khodorkovsky, President Putin had become increasingly troubled by the oligarch's effort to dislodge him from office by financing opposition parties. Mr. Putin was also concerned about the growing corruption attributed to high-flying businessmen. He was encouraged to crack down on them by Russia's siloviki, the group that Harvard's Prof. Marshall I. Goldman says consists of "law-and-order types from the KGB, the police and the army that Putin had been bringing into the government."

Yesterday, however, Mr. Ivanov suggested that the crackdown against Yukos would not affect the confidence of foreign investors in the Russian economy, whose gross domestic product of $360 billion grew by a respectable 7.3% in 2004. He pointed to new deals being concluded by American companies such as ConocoPhillips and ExxonMobil. And he assured his audience that foreign capital was safe in Russia.

That assurance doesn't appear to resonate with domestic Russian businessmen, however. Russia's Central Bank disclosed yesterday that legal capital flight was $7.9 billion last year, triple the figure in 2003, or 2% percent of the country's GDP. And illegal capital flight was $23.6 billion in 2004, almost 10 percent of the GDP and some 50% higher than the $15.5 billion estimated to have occurred the previous year.

Where that capital goes is largely unknown. Russian legitimate investment in the American economy is about $1 billion, one-sixth of American investment in the Russian economy. Mr. Ivanov, who met earlier with President George W. Bush and Defense Secretary Donald Rumsfeld, said he relayed to both men Russia's "keen desire for greater economic cooperation" with America.

But with many other nations competing for foreign direct investment -- which is about $150 billion annually from the US and other industrialized nations -- Russia may have a tougher time persuading new entrants to support its economic ambitions if perceptions persist that the Putin government acts capriciously and vindictively.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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