* Row over Djezzy mobile phone firm heads for resolution
* May presage change in attitude to private investment
* Dependence on energy revenues may not be sustainable
* Pressing need to reduce youth unemployment
ALGIERS, April 11 (Reuters) - After a three-year campaign against one of its biggest foreign investors chilled Algeria's business climate, the country is sending out tentative signals that it may be ready for a thaw.
A period of aggressive economic nationalism, symbolised by the state's drive to take control of the Djezzy mobile phone business owned by Amsterdam-headquartered Vimpelcom, has failed to create the jobs demanded by the population.
Now the Djezzy saga seems to be limping towards a resolution, and this could coincide with a broader rethink of how the government of energy-rich Algeria treats private investment.
"It is obvious that foreign investment is key to creating jobs, which will alleviate social pressure," said Bachir Msitfa, an Algerian economist. "This is why I am expecting changes in the economy in 2012...Algeria will go back to a market economy very soon."
The roller-coaster fortunes of Djezzy have matched the peaks and troughs of Algeria's attitude to free enterprise.
Egyptian firm Orascom Telecom won the right to set up Djezzy in Algeria back in 2001, during a wave of economic liberalisation forced on the country by heavy debts and low prices for its chief exports, oil and natural gas.
By 2008, Algeria was flush with cash from high energy prices, and its socialist-leaning rulers saw the global financial crisis as proof that market economies were flawed. They adopted a package of new laws restricting private investment.
In quick succession, Djezzy was hit with millions of dollars in back tax bills, a mob ransacked its offices, it was put under investigation over its currency transactions, and the Algerian government announced it would nationalise the firm.
Now, the pendulum may be swinging back the other way. Algerian officials are in talks with Djezzy's new owner, Vimpelcom, on a deal that would see the government buy 51 percent of Djezzy and leave Vimpelcom as operator.
The negotiations have been complicated by an Algerian court decision last month to impose a $1.3 billion fine on Djezzy over its currency deals. Finance minister Karim Djoudi said the ownership talks might take several more months; he declined to disclose any valuation for the firm, which some analysts think may be worth several billion dollars.
Nevertheless, analysts who follow the affair say the overall direction appears positive. Any deal with Vimpelcom could end an episode that has tainted Algeria in the eyes of international investors and allow it to start rebuilding its reputation.
"It is encouraging that the Algerian government...and the owners of Djezzy appear to be talking to each other," said Simon Kitchen, strategist at Egyptian-based investment bank EFG-Hermes. "There was a period when there was name calling and not much was happening."
The negotiations, he said, could be evidence of a broader thaw in attitudes to the private sector. "There may be a recognition that it is not enough to have a lot of money coming in from oil."
Few people expect that Algeria's ruling elite will have a complete change of heart and embrace capitalism unreservedly.
Orascom Telecom's former chairman, Naguib Sawiris, is one investor unlikely to be tempted back. He is withering in his assessment of Algeria's treatment of Djezzy.
"We have then seen provocations, our HQ has been set on fire, the government has demanded back taxes, and it stopped our import operations," he said in an interview with Al Jazeera television in January.
"In one word, there is no difference between the Algerian regime and (former Libyan leader Muammar) Gaddafi, and all the regimes that have failed in Yemen and Syria," he said.
Algerian officials deny that they have victimised Djezzy, alleging that it consistently violated the rules of doing business, leaving the government no choice but to take action within the law against the company.
Few would dispute, however, that the ruling elite remains fiercely nationalistic, suspicious of capitalism, and prickly about what it views as economic imperialism.
Algerian President Abdelaziz Bouteflika, 75, counts Cuba's Fidel Castro as a personal friend. When Bouteflika received a visiting minister from an east European state in Algiers in the last few months, he asked if the country regretted dropping its socialist command economy, according to someone at the meeting.
Issad Rebrab, owner of Cevital, one of Algeria's biggest homegrown private firms, does not hide his frustration at the business climate. "The government wants to control everything," Rebrab, whose interests range from sugar production to supermarkets, said earlier this year.
"We are the only country or one of few countries in the world where you have to ask permission to create jobs and wealth, and there is no guarantee you will get it."
In the World Bank's 2012 "Doing Business" index, which ranks business climates, Algeria was in 148th place out of 183 countries. Last year, neighbouring Morocco received about twice as much foreign direct investment as Algeria, even though the Moroccan economy is smaller.
Yet if Algeria's rulers have little enthusiasm for capitalism, they are also pragmatists who understand the need to create jobs - especially in light of "Arab Spring" uprisings elsewhere in the region.
Unemployment stands at about 10 percent overall, and about 21 percent among young graduates, the same group whose anger helped propel last year's revolutions in Egypt and Tunisia.
Algeria's policy for the past few years has been to use its cash reserves to stimulate economic growth and job creation, through major infrastructure investments, higher public sector wages, food subsidies and grants to promote small businesses.
While all this has helped to cut joblessness and raise incomes, there are questions over how much longer the approach can be sustained.
The government has been spending more than it earns; cash reserves are shrinking. In order to balance its budget four years from now, Algeria will need an oil price of $110 per barrel, compared to $44 a barrel in 2006, according to an International Monetary Fund report published in January.
That, said the report, leaves "the fiscal position highly vulnerable to a major slump in oil prices". Prices for crude are now around $120 per barrel.
Another point of vulnerability is that while Algeria's revenue from crude sales is high, changes in the global market have worsened the outlook for natural gas exports, which make up 49 percent of the country's total exports.
Growth in demand for gas is slowing, both because of economic weakness in Algeria's chief gas markets of Italy and Spain, and because new "shale gas" technology is allowing traditional gas importers to extract the fuel at home.
As a consequence, Algeria's model of state-driven growth may become harder to afford. Its opaque style of government makes it hard to judge if this will cause a change in economic policy.
Some loosening of the state's grip on the economy looks inevitable over the next two years, however. Bouteflika, viewed by many as the architect of the swing towards economic nationalism, must step down when his third term ends in 2014.
His prime minister Ahmed Ouyahia, who carried out the president's crackdown on foreign investors with zeal, could be gone soon after parliamentary elections on May 10 this year, because his party is expected to do poorly.
Already, some policy changes are discernible. The energy minister has promised a review of the law to make investing in Algeria more attractive for foreign oil companies. Algeria last month settled long-running tax disputes with energy firms Maersk Oil and Anadarko.
These moves are significant because energy policy - more hard-headed and less ideological than other areas since it pays the country's bills - is often a leading indicator of where broader policy is headed.
Meanwhile, the government is laying plans to allow foreigners for the first time to buy shares in listed companies, stock exchange head Mustapha Fefera told Reuters last month.
For Ahmed Benbitour, prime minister at the more business-friendly start of Bouteflika's tenure in 1999-2000, a thaw cannot come soon enough.
"If national companies don't invest at home, how can you expect a foreign investor to come and invest here?" he told Reuters. "These are not the conditions which will allow the country to develop."