Oil and Gas

Ex-aide says Russian war rhetoric scaring markets

MOSCOW, Oct 20 (Reuters) - A former Kremlin economic aide turned critic said on Monday that Russia’s bellicose rhetoric had scared away investors.

“The Russian leadership is not scared of a Cold War,” Andrei Illarionov told a news conference. “But, in contrast to the Russian leadership, investors are scared of any war, whether hot or cold, or even any talk of war.”

“So ... any investor thinking on a medium- to long-term perspective will decide to remove funds from states whose leadership isn’t scared of war.”

Russia’s stock market has fallen more than 70 percent from its peak in May, making it one of the world’s worst performers over the fast few months.

The Kremlin has blamed external factors, in particular the credit crisis in the United States, but Illarionov said Russia’s own policies had made matters much worse.

“It’s completely clear that investors, both foreign and Russian, judge the situation of the Russian economy as much worse than that of other countries, with the possible exception of Ukraine,” he told reporters.

He blamed government clashes with the private sector over the summer, the war with Georgia, Moscow’s unilateral recognition of the independence of two rebel regions of Georgia, and Russia’s bellicose rhetoric for the under-performance.

Investors were unnerved over the summer by perceptions that the Kremlin was backing four Russian-connected businessmen in trying to seize greater control of TNK-BP, their 50-50 oil joint venture with Britain's BP Plc BP.L; and by public accusations from Prime Minister Vladimir Putin that coal miner Mechel MTLR.RTS was overcharging.

Illarionov, who advised then-president Vladimir Putin on economic issues before resigning in 2005, is a rare critical voice on economic policy in a country where debate is rare. Many bank analysts based in Moscow avoid criticising official policy.

Illarionov heavily criticised both Western and Russian government plans to ease the credit crunch, saying they amounted to a public bailout of bad decisions made by the private sector.

But he said Russia’s bailout plans were much worse because it was spending around 12 percent of GDP, compared to 5 percent in the United States.

Access to this money was “through a small circle of banks and corporations” closely connected to those in power, he added.

“The financial crisis or the markets crisis is being used to redistribute the resources of the nation’s economy ... and for the creation of near monopoly control over the Russian economy,” Illarionov said. “... This is really a catastrophe”.

Russia’s rescue funds are mainly being channelled not through central banks but less transparently through big state-run banks, giving them the power to decide how funds will be allocated.

The former Kremlin aide, who is now a senior fellow at the Cato Institute in Washington DC, said he had recently done a study comparing macro-economic policy in Russia and Nigeria -- two major oil producers that had suffered from lower oil prices.

“We came to the conclusion, unpleasant for us, that today macroeconomic policy in Nigeria is conducted on a much higher level than in Russia,” he said.

This, he said, helped explain why Nigeria’s stock market had performed much better than Russia’s this year. (Editing by Kevin Liffey)