Annual review has Russia plc in black

Two thousand and seven saw the Russian economy shrug off an inauspicious start, only to be hit by the Litvinenko crisis. Nonetheless, when nerves settled following the June summit in St Petersburg, rapid growth returned, meaning the year ended favourably.

This year was one of massive contradiction in the Russian economy. On one hand, Russia reaffirmed its growing reputation as a highly attractive business destination. On another, the year saw the emergence of several risks that could halt the country's stellar progress.

It all began badly for Russia, with analysts worrying about increased government interference in the economy and the related risks to private property. This, as well as the uncertainty surrounding the forthcoming elections, was the impetus for a lot of money to flee the country. In May the outflow of capital exceeded inflow for the first time in months.

But there were also positive developments.

The London Russian Economic Forum, held in April, praised Russia's progress (even though Russian officials boycotted the event because of strained relations with the West following the Litvinenko affair). Speakers at the forum said that Russia had become one of the world's most attractive markets, offering maximum returns on investment. A second forum, held in St Petersburg in June, discussed practical projects. This time official Russia, headed by President Vladimir Putin, was very much in attendance.

This seemed to turn the tide. The international business community was reassured about the continuity of policy following the elections and pleased with the government's commitment to improving the investment climate, thus reducing capital flight.

Russia is now regarded as a country that all major international companies want to have some form of representation in and, preferably, production facilities. Though red tape remains a problem, few businessmen worry that they will not turn a profit here. Many report that their plants in Russia are becoming the most profitable units in their business empires - even more profitable than production in China.

At the same time, the Russian government began consolidating the assets under its control. It set up corporations uniting shipbuilding, vehicle manufacture and aircraft construction plants and invested hugely in the economy through development institutes.

State consolidation has not deterred investors who are worried about increasing government interference in the economy. On the contrary, the two processes have run in tandem. In many cases, the state has taken control of heavy industries which private business had shown no interest in. As a further incentive, the government's investment in development institutes has provided investors with access to state funds.

A healthy consumer market is another reason for optimism. Wages and consumer lending are outgrowing production in Russia, yet a mortgage crisis has (so far, at least) been averted. Russian consumers remain the most energetic in the world. They are richer than the Chinese and more lavish than Europeans, who are weighed down by taxes and high utility fees.

To be closer to such a customer, one needs to localise production. In September Russia's Economic Development and Trade Ministry stopped accepting requests for permits to build car-manufacturing plants because the supply of cars exceeded demand.

The duration of this boom will depend on global markets, the results of the parliamentary and presidential elections, and many other factors besides, such as oil prices. This will benefit the rich but also, indirectly, ordinary Russians.

The business community doesn't think that 2007 marks the end of the good times, as their new projects are designed to last for at least five years. Russian officials also have faith in this view.

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