The doubts were brought into focus by the Yukos affair and the clumsily handled trial of its founder, Mikhail Khodorkovskii. In a thinly veiled reference to the affair, a report in June by the Organization for Economic Cooperation and Development said "the security services, the prosecutors, and the police remain highly politicized and have frequently been deployed against businessmen" who are in conflict with the federal or regional authorities.
The first to suffer was business confidence. Al Breach, an economist at Brunswick UBS in Moscow, said the damage inflicted by the Khodorkovskii affair cannot be underestimated.
"It was a disaster and it has long-term consequences because while these guys are around there's a clear sense that law is subjugated to politics and so that remains and it means the property-rights issue is still out there," Breach said. "There's less sense of clear property rights than there was."
Yet something has clearly begun to change. Despite the disruption caused by the Yukos affair, the oil sector performed well in 2004, sustaining growth of over 8 percent, while GDP grew by a respectable 7.1 percent.
That and the booming foreign-investment levels recorded last month has been taken by some to mean that Russia has put the Yukos affair firmly behind it. Breach said he believes the economy is in good health.
"The budget surplus this year is going to be over 5 percent of GDP," Breach said. "All the countries in the world are with big deficits, but Russia is running a huge surplus. It's state finances have gone from being bankrupt in '98 to being a net creditor. And you've got significant wages growth, significant profit growth, domestic demand is growing at 8 percent. That's a fabulous macro situation."
One reason for the surge in confidence may be President Vladimir Putin's efforts to reassure the business community that there will be no more state grabs of private assets. In March, he promised to reduce the time limit within which privatizations can be legally challenged from 10 years to three, which, in theory at least, ought to put the privatizations of the mid-1990s out of reach.
Breach said he believes that may be enough to unshackle economic growth.
"These guys [Russia] are super oil-rich. Oil prices are up three times, the amount of money flowing into the country is through the roof and these guys are struggling with a little slowdown," Breach said. "The economy would be flying if they hadn't done Yukos. However, people are making a lot of money here in most businesses and growth is still strong, domestic demand growth is still strong, finances are in good shape."
And yet the doubts continue to persist. Yes, foreign investment is up but it's still below the level of several middle-ranking developing economies and overall economic growth is showing signs of a slowdown. GDP increased by just 5.2 percent in the first quarter, the lowest quarterly figures for Russia in three years, while industrial production in May grew by a mere 1.4 percent. The Economic Development and Trade Ministry has had to revise GDP growth figures for this year down to 5.8 percent.
That may sound reasonable, but if Russia is to meet the target set by President Putin of doubling GDP by 2012, its rates of growth need to be 7-8 percent. Economic Development and Trade Minister German Gref is warning that unless the sharp slowdown of the first quarter is halted -- and there is no sign that it has been -- growth could fall even further in 2006. And that at a time when inflation threatens to top 13 percent this year, well above the targeted 10 percent.
And, according to Roland Nash, chief strategist at Renaissance Capital in Moscow, not even the investment figures are entirely rosy.
"There is more foreign investment coming into Russia than ever, which is obviously very good news. The flip side of that is that the rate of growth of domestic investment has actually been falling and I think that there is a danger of confusing very good financial ratios with a really booming Russian economy," Nash said. "The Russian economy is growing -- it is growing at about 5 percent per annum but it could be growing much more quickly."
And the reason for that, analysts suggest, echoing the OECD, lies in growing state interventionism and the persistent opacity and corruption of state institutions, in particular the judiciary. Capital flight hit almost unprecedented levels in 2004 and, according to Gref, will reach between $5 and $7 billion this year.
With oil prices at more than $60 a barrel, Russia finds itself in the enviable position of sitting on a budget surplus. That gives it a unique cushion for diversifying its economy and carrying through the sort of economic reforms needed to stimulate domestic enterprise. An opportunity though may be being lost. President Putin's priority appears to be to use the oil windfall to pay off Russia's debts to the West -- for him a source of national shame -- but in doing so he may be missing an opportunity for a radical overhaul of an economic system that is creaking at the seams. The question being asked is: what happens if the oil revenues dry up? So far, no one has an answer.