Politics, capital flight eclipse "Russia's Davos" (Reuters)

ST PETERSBURG, Russia (Reuters) – The Kremlin's annual investment pitch to the world was overshadowed by one uncomfortable fact: Tens of billions of dollars are fleeing Russian assets ahead of the March 2012 election.

Russia may be one of the few places where foreigners can buy into both swift growth and vast mineral resources, but some local investors have been hedging against the country's tumultuous political history by buying dollars.

Behind the spin of the St Petersburg International Economic Forum, which ended on Saturday, investors grappled with two questions: Who will rule Russia after the election, and why have there been net capital outflows of $55.6 billion over the past eight months?

President Dmitry Medvedev gave an answer of sorts.

He laid down his credentials for a potential re-election bid by warning that unless "my choice" of modernization is implemented, Russia faces stagnation two decades after the fall of the Soviet Union.

"The notorious stability could hide another period of stagnation," Medvedev told investors, impressing many but also prompting some to ask whether he would finally start acting on the many promises he has made but often failed to keep.

Prime Minister Vladimir Putin, who is viewed by most Russians as the paramount leader, was silent in Moscow.

In previous years, Putin has upstaged Medvedev during the forum by berating oligarchs or sealing big energy deals. This year, the 58-year-old former KGB spy met the health minister and the head of Russia's national archives in the capital.

Putin and Medvedev, 45, have not said which of them will run but the two -- allies who have worked together for two decades -- have occasionally appeared to differ in recent months, prompting speculation about a split between Russia's leaders.

At the forum, Russia's answer to Davos, Medvedev brushed off a question on whether he would run but said there remained "very little time to wait" for a formal announcement.

"The two potential candidates are not 100 percent the same. It is visible not only in their political statements but also in their ages," said Anatoly Chubais, who headed late President Boris Yeltsin's campaign in the 1996 election.

"But at the same time, it would be wrong to consider these two candidates as opposite to each other."

BANK ON A BOOM?

Russian officials played down political risks to the $1.5 trillion economy, telling investors they could miss out on profits if they waited for the election.

These officials point to growth rates which the International Monetary Fund forecast will make Russia a $3.2 trillion economy by the end of 2016, or the fifth-largest economy after the United States, China, Japan and Germany.

"There are certainly clients of ours who think there could be dramatic change depending on the outcome of the elections, but our advice to them is usually not to wait," said Christopher Barter, head of Goldman Sachs in Russia.

Capital flight has been draining Russia's economy. Since the Soviet Union's collapse in 1991, Russia has had only two years of net capital inflows -- in 2006 and 2007.

But with oil, the lifeblood of the Russian economy, trading at more than $100 a barrel, investors have been puzzled by a return to such sharp net capital outflows, which the central bank forecasts will reach $30 billion-$35 billion this year.

"With international clients, the elections are having a small impact," Stephen Jennings, CEO of Renaissance Capital, told a breakfast discussion.

But Jennings, who has worked in Russia for two decades, said Russian investors were moving assets abroad because of perceptions of heightened political risk.

"You see that in the capital flight numbers," he said.

First Deputy Prime Minister Igor Shuvalov called the widely quoted capital outflow figures "dodgy" and said much of that money was not fleeing Russia, but merely being changed into U.S. dollars and kept in accounts in Russia.

"Russia continues to be out of fashion -- we are very late with reforms. We need to make a lot of swift movements to satisfy the foreign investor," said Sberbank Deputy CEO Bella Zlatkis, a former deputy financial minister.

"If we do not do this, then the capital outflows will continue despite the high oil prices," she told Reuters.

(Additional reporting by Kyril Sukhotski, Oksana Kobzeva and Katya Golubkova; Editing by Dan Williams)

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USS Monterey's Black Sea arrival raises Russia's hackles (The Christian Science Monitor)

Moscow – It's not quite the Cuban Missile Crisis, but it has some Russians recalling that grim cold war episode.

Moscow claims the US is violating a strategic understanding, and potentially threatening Russia's nuclear deterrent, by sending the antimissile cruiser USS Monterey to participate in Black Sea war games with a dozen other nations.

Russia, which objects to any US military incursion into the Black Sea, was bound to disapprove of this week's Sea Breeze 2011 international naval exercises, cosponsored by the US and Ukraine, whose theme this year is antipiracy operations.

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But the decision to send the Monterey, equipped with advanced Aegis antimissile weaponry, has Moscow unusually agitated and apparently fearful that the US is trying bypass ongoing – and deeply troubled – talks over European missile defense and slip a strategic threat into Russia's own back yard under the cover of peaceful exercises.

"If a routine 'visit' to this extremely sensitive region is the issue, why was a warship with this particular type of weaponry chosen?," the Russian Foreign Ministry said in a sharp statement Sunday.

"We have to state that our concerns continue to be ignored and under the guise of talks on European missile shield cooperation, efforts are under way to build the missile shield configuration whose consequences are dangerous and about which we have numerously informed our US and NATO partners," it added.

The foreign ministry statement suggested Russia has received US assurances that the planned missile defense shield, designed to protect the West from rogue attacks, would mainly focus on ship-based Aegis deployments in the Mediterranean Sea, to defend southern Europe. They would only be sent to the Black Sea if the situation "deteriorated" in the region, it said.

"The Russian side has said on many occasions that we will not leave without attention to the emergence of elements of the US strategic infrastructure in the direct vicinity of our borders and will take such steps as a threat to our security," it added.

Ukraine's foreign ministry said it sees "no threat" to any country from the naval games, which are designed to highlight international cooperation on security issues of universal concern.

US State Department spokesman Mark Toner said Monday that "[The Russians] are entitled to their opinion ... . But we have a strong bilateral relationship with Ukraine, and it's in keeping with that kind of partnership that these exercises take place."

Ukraine has moved briskly into Russia's strategic orbit over the past year, and effectively shelved its previous application to join NATO.

Experts say that international exercises like Sea Breeze are crucial elements in Kiev's policy of trying to balance West against East, while hoping to enjoy good relations and wrest economic benefits from both.

But the Russians insist that missile defense is a make-or-break issue for US-Russia relations and they see the Monterey's appearance in the Black Sea, sans prior consultations with Moscow, as a troubling precedent.

"The Black Sea is a closed sea, and the intrusion of this US warship breaks existing traditions," says Konstantin Zatulin, a Duma deputy with the ruling United Russia party. "There is a realistic fear that the balance of forces in the region could be altered... .

"Remember the Cuban Missile Crisis? We know how Americans react when someone drops new strategic facts into their backyard, so they should understand that this episode gives us no joy."

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Libya rebels welcome Russia's change

A compound belonging to embattled Libyan leader Moammar Gadhafi was hit by explosions on Saturday morning.NEW: National Transitional Council in "financial crisis," chairman saysA Libyan official says NATO strikes two compounds Libyan opposition says it sold $160 million of oil to ChinaNATO says it targeted a vehicle storage area at Bab bin Ghashir

Tripoli, Libya (CNN) -- The head of Libya's opposition government told reporters Saturday he welcomed a call Friday by Russian President Dmitry Medvedev for Moammar Gadhafi to step down.

Medvedev's statement, echoing the stance of American and European leaders, appeared to indicate a closing diplomatic window for the longtime Libyan strongman.

The chairman of the National Transitional Council, Mustafa Abdul Jalil, said he has offered amnesty to Gadhafi loyalists who defect before the demise of the regime, but reiterated that there will be "no negotiation for any solution until Gadhafi's departure."

Once that happens, elections and a constitutional referendum will be held within a year, Jailil said in the opposition stronghold of Benghazi.

In an interview with CNN, Jalil said the council had sold a shipment of oil to China for $160 million. The confirmation of the sale is expected to buttress the political and economic credibility of the fledgling rebel power.

The leader said the movement has a "financial crisis" and is seeking loans from outside the country.

The council is happy for political support, but will not ask Russia for arms or economic aid, Jalil said.

The unrest in Libya has persisted for months as opposition members demand an end to Gadhafi's nearly 42-year rule.

Jalil marked the 100th day of the nation's civil war.

"We see victories emerging at both national and international levels," he said. "We should celebrate what our heroic sons have accomplished in Misrata and the Nafusa mountains, as well as applaud the wide international support for our revolution."

Meanwhile, a series of morning explosions rocked the capital of Tripoli on Saturday, including blasts at a compound belonging to Gadhafi and one at a nearby tribal compound, a government official said.

The official said one morning strike occurred on Bab bin Ghashir, a tribal compound near Gadhafi's Bab al-Aziziya compound, where the other strikes occurred. The official believed the strikes were NATO attacks.

No casualties were reported.

Morning strikes in Tripoli are rare. NATO confirmed one of the attacks -- a press officer said the strike on Bab bin Ghashir was timed to minimize civilian casualties.

NATO said it targeted a vehicle storage area at Bab bin Ghashir.

The tribal compound is used by people who volunteer as support forces for Libyan authorities. A decade ago, the site was used as a military station.

NATO is operating under a U.N. Security Council resolution authorizing the use of any means -- with the exception of foreign occupation -- to protect civilians from attack or the threat of attack. It has been conducting airstrikes targeting Gadhafi's military resources.

CNN's Amir Ahmed, Raja Razek, Nima Elbagir and Ben Wedeman contributed to this report.

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