For foreign investors in Russia’s growth, these are heady times. Medvedev, a capable technocrat, offers credible promises to further liberalise non-strategic sectors of the Russian economy. The country has an exceptionally strong fiscal position, the world’s third largest gold and currency reserves, and projected GDP growth of between 7 and 7.5 per cent for 2008. Rules of the road for foreign investment have become clearer over the past year, and Russia’s new president will ensure they become clearer still.

The country’s middle class has grown substantially in recent years, allowing foreign and domestic investors alike to profit from the rising demand for a wide range of consumer products. In addition, the Russian economy is ideally positioned to profit from the current geopolitical environment. Three economic sectors vital to Russia’s growth — oil and gas, arms, and nuclear energy — are much in demand around the world these days.

Local business leaders I met during a recent visit to Moscow seemed convinced that a US economic slowdown holds few risks for Russian growth. Investors were bullish on everything from opportunities created by the longer-term effects of climate change on Russia’s Arctic shipping lanes to an underdeveloped agricultural sector that could eventually become an important player in alternative energy markets.

But make no mistake — Medvedev’s market-friendly, pro-Western disposition does not herald a less confrontational Russian foreign policy. Medvedev is Putin’s man; he basks in the reflected glow of Putin’s 70-plus per cent approval rating. His campaign was managed by Sergei Sobyanin, Putin’s chief of staff. Without Putin’s endorsement, Medvedev could not have become a candidate, much less Russia’s president.

Putin and the former and active members of the military and security services within the Kremlin elite (known as the siloviki) are still very much in charge of Russia’s increasingly assertive foreign policy. Russia’s relations with the United States and European Union, at their lowest point since the Brezhnev era, are likely to deteriorate further. There are plenty of potential points of conflict.

The first is in the Balkans. Kosovo has declared independence from Serbia. In response, the Kremlin might be tempted to use Western support for the move as political cover to stoke trouble in neighbouring Georgia by persuading separatists in breakaway republics within that country, a former Soviet Republic with a pro-Western president often at odds with Moscow, to declare their own independence. Russia could then destabilise its neighbour by inserting troops into these enclaves under the pretext of protecting the Russian citizens who live there. Any armed conflict in Georgia risks spillover effects for trans-Caucasian energy routes.

It has also become apparent over the first few weeks of 2008 that Russian-EU tensions over energy supplies have not gone away. Moscow continues to resist pressure to sign on to European proposals for an energy charter that would open Russia’s upstream and pipeline assets to more foreign ownership and competition. At the same time, Russia is pursuing downstream assets in its business and energy relations with Europe, generating anxiety and resistance within some European countries.

The Kremlin will continue to use energy exports to exert pressure on several former Soviet republics to preserve Russia’s political leverage vis-a-vis their governments. Last spring, Estonia accused Russia of launching a cyber-attack on government, banking, and media websites in the country to punish its leaders for ordering the removal of a Soviet-era war memorial from the centre of the capital city.

Despite a deal reached between Putin and Ukrainian President Viktor Yushchenko in February, Gazprom, Russia’s natural gas monopoly, has again threatened to cut off supplies to that country. If Ukrainian Prime Minister Yulia Tymoshenko decides she can score domestic political points by antagonising the Kremlin, she could provoke another gas disruption by challenging the Putin-Yushchenko agreement. Ukraine gets 71 per cent of its gas from Gazprom.

Washington and Moscow will continue to butt heads over a US plan to deploy components of a missile defence system in Poland and the Czech Republic, Moscow’s suspension of its commitments under the Conventional Forces in Europe treaty, and its weapons sales to Iran, Syria and Venezuela. In particular, Russia’s decision to complete construction of Iran’s nuclear reactor at Bushehr and to provide Tehran with advanced air-defence systems will undermine any Bush administration attempt to salvage the warm relations Bush and Putin appeared to enjoy when the two first met.

An election year in the US will widen the divide. Presumptive Republican nominee John McCain has called for “revanchist Russia” to be excluded from the G8 group of industrialised nations. Likely Democratic nominee Barack Obama would take a less confrontational approach, particularly since he hopes to work with the Russian government to secure Soviet-era nuclear weapons and material. But he argues that Washington “must not shy away from pushing for more democracy and accountability” in Russia — a message unlikely to receive a warm reception from the Kremlin.

For the time being, the political leverage (and revenue) provided by historically high oil prices and the domestic popularity of the Putin/ Medvedev regime will ensure that Russia will become increasingly self-confident. But longer-term, that may prove dangerous. It may allow Russians to ignore structural problems that matter for foreign investors.

Transparency International, a non-profit watchdog, ranked Russia 143 out of 179 countries for perceived corruption in 2007. Russian courts and judges remain among the world’s most suspect. Kremlin insiders use the tax police as a weapon for score-settling with political and business rivals. Commercially motivated murders of local businessmen are more common in Russia than in almost any other emerging market country. Russia also trails its emerging market competitors in domestic investment dollars per capita, and the lion’s share of Russian capital continues to head for the exits.

The greatest long-term threat to Russia’s emergence may come from the Putin/Medvedev partnership itself. As Medvedev grows into his new job, amasses political capital of his own and begins to pursue policies that Putin does not favour, which man will give way? Might signs of rivalry between the two men force Kremlin insiders to protect their political interests and economic assets by taking sides in hopes of betting on the winner? We won’t know for certain unless and until it happens. If it does, the consequences will surely be bad for business — and for Russia’s long-term political stability.

Ian Bremmer, president of Eurasia Group, a political risk consultancy, is the New York-based author of ‘The J Curve: A New Way to Understand Why Nations Rise and Fall’

express@expressindia.com