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UN Warns Yukos Affair Could Hurt Russian Economy - 2004-07-21

U.N. economists warn Russia's prosecution of the oil giant Yukos and its former chairman could drive away foreign investors and hurt the country's economy. The U.N. Economic Commission for Europe says it expects Russia's Gross Domestic Product, which is driven by the oil industry, to grow by a hefty seven percent this year. But U.N. economists caution Russia's criminal pursuit of Yukos' former chief, Mikhail Khodorkovsky, which is widely regarded as politically motivated, could discourage foreign investment and dampen future growth.

Mr. Khodorkovsky was imprisoned on charges of fraud and tax evasion, but his prosecution is seen by many as a price he is paying for his financial support of political opponents of President Vladimir Putin. Yukos is fending off the government's decision to sell its main subsidiary to settle a $3.4 billion bill for back taxes.

U.N. Senior Economist, Rumen Dobrinsky says the Yukos affair has made many people apprehensive about investing in Russia. He says the effect on the investor community will depend on its legal outcome.

"If the investor perception will be that the Yukos affair is not resolved in accordance with the rule of law, this will obviously have a detrimental effect on the investment and business climate in Russia," he said.

Charles Wyphosz, a Professor of Economics at Geneva's Graduate Institute for International Studies, agrees. He says when property rights in a country can be challenged by the government, international investors react badly. He says the Russian economy is very vulnerable to outside forces because it is dependent primarily on oil and gas.

"It is very dependent on world prices,? Mr. Wyphosz said. ?It has not developed much of an indigenous, internationally competitive industry. The Yukos affair is not going to encourage the development of such an industry. And more worrisome, it is likely to discourage further investment in oil and gas extraction. Since this is the country's only source of wealth, there might be a heavy price for this kind of event down the road."

On Europe's economy in general, the U.N. economists say they expect growth to continue and accelerate in the second half of this year and in 2005.