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Analysis From Washington - Putting Foreign Investment at Risk

Washington, 10 April 1997 (RFE/RL) - A Russian court ruling calling for the renationalization of a firm in which foreigners have a stake and a Duma vote against efforts to break up monopolies may put at risk any future foreign investment in Russia.

At the very least, these two decisions will increase nervousness among potential Western investors. And they are likely to spark a political struggle within the Russian government and to exacerbate tensions between that government and the Russian people.

Last week, a Russian court ruled that the state should declare null and void the privatization of a Russian gold company in which foreign interests have a 60 million dollar stake.

The judges of the Supreme Arbitration Court based their decision on an apparent violation of a law which Moscow said in 1992 did not apply in this case.

Many in the Russian government and in the Western financial community said that they found this call for renationalization strange because it reverses a February 1996 decision by the same court on the same subject.

But all agreed that this decision would dampen the enthusiasm of foreigners thinking about investing and that it could cost the Russian government enormous losses in tax revenue.

Then on Wednesday, the Russian parliament voted 332 to 1 for a resolution declaring "inadmissible" any effort by the government to break up Gazprom or to sell off its assets to foreigners.

The Duma action followed a declaration by Rem Vyakhirev, the president of the Gazprom gas monopoly, that foreign interests were behind efforts to break up his company and others.

If these forces were allowed to succeed, Vyakhirev warned, Russian consumers would face "the disorganization of gas deliveries" and "a rise in profits."

The resolution is non-binding, and like the earlier court decision, may not be implemented by Russian President Boris Yeltsin or his government.

But the two actions will certainly do three things, all of which may make the economic and political situation in Russia more difficult.

First, they will exacerbate the already serious divisions within the Russian government between those who believe that privatization and foreign investment are the way out of the crisis and those who fear both decentralization and foreign control.

Yeltsin himself has been committed to attracting foreign investment, but his prime minister, Viktor Chernomyrdin, who is a former head of Gazprom and who retains close ties to that monopoly, is significantly less committed.

These decisions are likely to sharpen existing disagreements not only between these two men but between the very different political forces and approaches they represent.

Second, they will only worsen relations between the central authorities and at least some of the Russian people, especially now that the Duma appears to have accepted the idea that foreign investment represents a plot against Russia.

Such notions, while almost certainly false, are likely to increase the anger of those Russians who have not been paid for many months and who believe that their government is responsible somehow for selling them out.

Communist leader Gennady Zyuganov reflected these views when he told a party congress in Moscow on Wednesday that the current situation in Russia had "more than enough flammable material" for a popular uprising against the government.

Again, such views are unlikely to win the backing of most Russians, but they will inflame passions and make any future reforms more difficult.

And finally, these two decisions will give Western investors pause, even if Yeltsin and other Russian leaders attempt to reassure them.

Paradoxically, such a drawdown in Western investment would almost certainly increase the tensions within the Russian government and between it and the population.

Consequently, while these two decisions are not going to determine the future, they may cast a large shadow on it.