Bodyguards and brown envelopes: it's like old times in the new Russia

These are heady days for the world's second-largest oil exporter but will the economic miracle be strangled at birth? Clayton Hirst reports from Moscow

Inside Red Bar in the centre of Moscow, three bodyguards stand awkwardly, shifting their weight from one foot to another. They are dressed in black, and their eyes dart around the trendy bar on the 27th floor of a modern office development. With its stunning views of the city skyline, the venue has become a favourite haunt of Moscow's young and wealthy businessmen wanting a pre-dinner cocktail under the watchful eye of their hired protection.

The scene is repeated across many of Moscow's expensive restaurants and business hotels. But the security guards aren't for Russia's oligarchs, the handful of ultra-rich businessmen who a decade ago bought up the country's state assets for a song; they are protecting a new breed of entrepreneurs thriving in the country's capitalist economy.

Just five years since its economic meltdown, Russia is booming.

Moscow's streets are dominated by neon signs and hastily erected billboard advertisements with little regard for their historic surroundings. Queues of new German, Italian and Japanese cars bring the city's eight-lane roads to near gridlock at rush hour. And retailers are enjoying a bonanza on the back of soaring consumer spending.

The mood among Russia's business community is equally upbeat. Executives of companies with just a few years' trading record talk of floating on the New York, London and even Moscow stock exchanges (see right). The similarities to the Western dot-com boom of the late 1990s are startling.

Last year Russian GDP grew by 4.3 per cent and this year the Ministry of Economic Development and Trade estimates it will be 6.5 per cent. The spurt is oil-fuelled as Russia is now the world's second largest exporter. The former state-owned oil giants, such as Yukos, Sibneft and TNK, which are now controlled by the oligarchs, are raking in the profits on the back of the high oil price. This has caught the eye of the Western companies - spooked by the instability in the Middle Eastern oil-producing countries - which are now clamouring to invest in Russia. Already, BP has teamed up with TNK, and the world's largest oil company, ExxonMobil, is expected to buy a stake in Russia's largest producer, Yukos, by the end of the year.

President Vladimir Putin's government still wants more. "Foreign investment is crucially important," says Andrei Sharonov, Russia's deputy minister for trade and economic development, speaking to The Independent on Sunday. "We are not happy about the total amount of direct foreign investment. There is a lot of space for more." In a clear indication that the government will not stand in the way of ExxonMobil buying Yukos, he adds: "We think the deal will happen and Yukos will attract the biggest world investor." However, Mr Sharonov admits: "We need to diversify our economy and push forward measures to decrease our dependence on oil."

To encourage this, President Putin's government is driving through far-reaching administrative, legal and corporate reforms in an attempt to sweep away the country's legacy of bribery, corruption and murder. Richard Wallace, director of the Russo-British chamber of commerce, says: "Russia has turned around 100 per cent. It is now a very attractive place to invest." But he adds that some traces of the old regime remain: "The country is still seen as being reasonably corrupt and a lot of brown envelopes still get passed."

Evgeny Yasin, a former economics minister and one of the founders of Moscow's prestigious Higher School of Economics, argues that basic state reforms remain to be tackled: "Tax inspectors are a problem. They have a huge amount of red tape and bureaucracy to go through. They are also into corruption, because tax inspectors don't earn enough money."

Russia's politicians are gearing up for the elections in the lower house of parliament, the Duma, in December. Presidential elections will follow in the spring. As President Putin is preparing the campaign, his administration is turning up the heat on Russia's richest oligarch, Mikhail Khodorkovsky, chief executive of Yukos. Last week, Russia's Prosecutor General announced that a tax probe into Yukos would be extended to Mr Khodorkovsky. Already two Yukos executives are facing prison terms and a major Yukos shareholder, Platon Lebedev, has been charged with tax evasion. The investigation is widely seen as politically motivated, as Mr Khodorkovsky has hinted he plans to stand for the Russian presidency in 2008.

The oligarchs are not popular with the general Russian population. This select group of businessmen, which includes Chelsea Football Club's new owner, Roman Abramovich, are criticised for snatching Russia's prized assets on the cheap. However, political analysts believe Mr Khodorkovsky could generate a strong following in the many states where Yukos is present.

The Yukos investigation is beginning to spook the Russian stock market, which sustained losses last week. On Thursday three powerful business lobby groups wrote to President Putin urging him to rein in the probe. Even Mr Sharonov, Russia's deputy trade minister, urges caution: "Having conflict between the authorities and business is not good news for investors - both foreign and domestic. It is unfortunate because it does not make Russia attractive. We should keep this in mind when considering foreign investment."

Russian businessmen are also worried about the consequences of the Yukos affair, especially if new corporate and tax laws are applied retrospectively. David Iakobachvili, chairman of Wimm-Bill-Dann, a large Russian food company listed on the New York Stock Exchange, explains: "Until the mid-1990s, whatever we did in business was against the law - speculation was against the law. It is unfair that people are now being prosecuted because of the law of the times."

After the elections, President Putin is expected to crank up the pace of reform, turning his attention to more privatisations, with the railways and the electricity industry to be next off the blocks.

The reform of Gazprom will follow. Some 38.7 per cent owned by the government, Gazprom supplies a quarter of the gas consumed by Europe. Like many Russian monopolies, it has been tainted with allegations of corruption which forced President Putin to install his own man, Alexi Miller, as chairman in 2001. Mr Miller has, however, so far resisted moves to reform the gas colossus. He is also under pressure from the European Commission, which is unhappy that the company supplies gas to Russian industrial users at below cost.

Weaning industry off cut-price gas must be done gently, according to Yaroslav Kouzminov, chancellor of the Higher School of Economics: "A huge amount of enterprises exist because we have internal subsidies. Some 30 to 35 per cent of Russian businesses couldn't exist if gas prices were set at market rates. The problem cannot be solved in three to five years." Nevertheless, President Putin plans to raise industrial gas prices by 38 per cent within the next three years and wants to eliminate the subsidy entirely by 2010.

By then Russia and its now thriving economy will face its true test. Favourable oil prices and President Putin's reforms have created a fertile environment for businesses. But only when the economy has matured, state subsidies are removed and Russia is exposed to fluctuating oil prices will we know if the country's neon glow of capitalism can last.

From the USSR by way of Wimbledon

A scientific breakthrough by the former Soviet military will form the basis of one of Russia's most intriguing company flotations. David Iakobachvili, right, one of the country's best-known businessmen, has developed a portable mask he claims will provide protection from 25 poisonous gases, including some nerve agents.

The product, called Pheonix, is already on sale in Russia for 1,250 roubles (£25). Mr Iakobachvili has won approval to supply the mask to Moscow's schoolchildren and even to President Putin's special security force.

The product is part of Mr Iakobachvili's private business empire, which employs 45,000 people. A friend of the Russian-speaking Prince Michael of Kent, he is also chairman of Russia's largest food producer, Wimm-Bill-Dann. He says: "The [flotation] may be in one or two years. I will consider London... I expect to make a lot of money."

The masks were developed by a team of 15 former military scientistsapproached by Mr Iakobachvili. Asked how he met them, he says: "I have many friends."

Born in Georgia, the 46-year-old is one of Russia's leading businessmen, having successfully floated Wimm-Bill-Dann on the New York Stock Exchange. The French food giant Danone has a 7 per cent stake in the company, which was created in 1992.

Mr Iakobachvili chose the name Wimm-Bill-Dann after hearing of the London suburb of Wimbledon on the radio. Russian firms with Western-sounding names were thought to have a business advantage.