Ben Aris in Berlin -

The Russian Economic Forum was a washout this year after the Kremlin put the kybosh on what has been the premier talk-fest for Russia investors. The latest in a string of public relations disasters, the Kremlin's decision to snub April's conference shows the window of opportunity to engage with Russia is almost closed.

No one really goes to the REF for the speeches (which are good), but to spend a few hours in the coffee hall that looks out over Westminster Abbey where in a few hours you can mingle and chat to more oligarchs and major corporations than you can shake a stick at. First and foremost it is a spectacularly good networking event for everyone and a must-do event for that reason alone.

It was to be expected that Russian government officials would pull out once the Kremlin orders were issued the weekend before the REF conference. And it's not surprising that the Russian industrialists who normally grace the forum would also cancel. But it was shocking that some of the established foreign businessmen who run respected Russian companies and generally regard themselves to be above politics would feel intimidated enough by vague threats to cash in their plane tickets, presumably "just to be on the safe side."

Reasons behind the no-show

There was a lot of speculation as to why the Kremlin ordered its officials to pull out on the eve of the event, but the consensus is that London was being punished for harbouring Chechen rebels and the patently treasonous ex-oligarch Boris Berezovsky, who openly claims to be funding an armed insurrection in Russia. The UK's Foreign Office has distanced itself from Berezovsky's comments, but there are a lot of bureaucrats walking about Whitehall with red faces at the moment; as if Russian-British relations were not strained already.

Another reason offered up is that the Kremlin has decided it would rather see the foremost investment conference happen in Russia and has been pushing the St Petersburg economic forum that happens later this summer. Certainly a lot of people at the REF are now considering going – some actually turned up for the St Petersburg forum's presentation at the end of the second day of the REF.

What is worrying about this "preference" for the St Petersburg do is that increasingly it looks like the Kremlin is drawing up lists of "friends of Russia" and businessmen believe they need to be on that list. The St Petersburg conference, which has not been prominent on the circuit, is now bound to leap up the ranking and the Kremlin would like to see it ultimately replace the REF as the premier Russian event of the calendar.

On top of this, the St Petersburg bash looks like a ham-fisted way of going about promoting business. Firstly, delegates have to be "invited" by German Gref's ministry of Economic Development and Trade. In plain text, this means businessmen will have to run about calling their Russian friends with connections to make sure they get on the list and pass fais kontrol if they want to go. Next, the ministry is in charge of booking hotel rooms and will make the travel arrangements for delegates who want to pay the $4,000 to attend.

The whole event will be tightly controlled by the powers that be, the antithesis of the London forum, which is open to anyone who pays the delegates fee and has an interest in doing business in Russia.

The Kremlin decision to bash the REF is a worrying example of the newfound confidence and aggressive stance of the Kremlin. Why interfere with what has been a very successful and illuminating forum in the past? It was, after all, a good showcase of the opportunities that Russia represents and a realistic appraisal of the difficulties of doing business there. On top of this, it was a place where both international and domestic investors could directly express their disappointments with government and call for change that would benefit the economy to people in a position to do something about it. It is unlikely the St Petersburg forum will be so open-minded. The point there is to show up and little more.

Which raises the question of how serious this whole fracas is? How worried should investors be? The international press gleefully fell on the boycott as another example of the Kremlin's growing authoritarian tendencies.

Isolation

Russia is in a paradoxical situation. On the one hand, Putin has espoused a "multipolar" foreign relations strategy; on the other hand, Russia is slowly isolating itself from the rest of the world.

This process started with the debacle that followed the Kremlin's heavy-handed attempts to influence the 2004 Ukrainian presidential elections. It was so badly and arrogantly managed that even the now Prime Minister Viktor Yanukovych, a staunch Russian ally, has moved to distance himself from the Kremlin and act more in Ukraine's national interests.

Then there was bust-up with Georgia in November after the government in Tbilisi arrested several Russians on espionage charges. The Kremlin's decision to slap an economic embargo on Georgia has been a public relations disaster, but what must really gall the Siloviki who now control the Kremlin, it had almost no impact on the Georgian economy (at best it shaved off 2 percentage points of growth in an economy that still grew 9% last year – faster even than Russia's). The upshot of the embargo is it highlights that the region is now developed enough that Russia actually has a lot less economic power, despite its size and importance in regional trade, than it thought it had.

Most recently is the showdown with Estonia over the removal of a Soviet war memorial. Relations with Estonia have been bad right from the beginning of independence and the tiny Baltic republic has long since weaned itself off dependence on Russia's economy. However, this row is still very damaging because Estonia is now part of the EU so it chaffs at already poor relations with the bloc.

And those relations, which have always been prickly, are deteriorating fast. The Kremlin lost its staunchest ally in the shape of German Chancellor Gerhard Schroeder last year and is about to lose French President Jacques Chirac, who is an admirer of Russian culture and has supported Russia in the past in its disputes with the US.

Both Chirac and Schroeder are convinced that Europe's future is in closer ties with Russia, but current German Chancellor Angel Merkel and French president-elect Nicolas Sarkozy are both much sharper critics of Russia.

Off the radar

Then there is the US. The week before the REF, this correspondent attended the RusRatings conference in New York, organised by Russia's leading domestic bank rating agency. Unlike the REF, only 30 people showed up to listen to the talks – Russia barely seems to register on the radar of Wall Street's bankers. The few fund managers who showed for the cocktail reception at the Russian consulate on the edge of Central Park have made a fortune from investing into Russia, but they are a small band of adventurers by local standards.

What was really striking about the New York conference, in contrast to the REF, which is all about technical presentations full of facts about returns, markets and regulations, the New York conference was almost all about politics.

In February, Schroeder gave a pep talk on behalf of his new employer Gazprom. He made a strong argument that Russia was a natural partner for Europe, but urged Europe to act now as "the window of opportunity is closing."

Since then things have gone from bad to worse and it appears that this window has almost completely closed. Putin lashed out at the US at a speech in Munich in February, which was received with indignation in Washington. The Russians got their turn to be indignant after the US floated plans to place a missile shield on Russia's doorstep in Poland or the Czech Republic, without first making any meaningful attempt to consult Moscow. Mutual mistrust is now reached a point where gaff is fuelling gall, and the two sides are pulling apart.

At the root of these decaying relations is the speed of Russia's transformation. Like Germany in the last decades of the 19th century, Russia is a rising power in Europe and is upsetting the long established balance of power that was cemented into place by the certainties of the Cold War: "here is the border with the good guys on this side and the bad guys on that."

Then, as now, Germany's phenomenally fast economic rise cause tensions, and in Germany's case these tensions eventually led to World War I. Current tensions are unlikely to lead to war in Europe again, but more effort needs to be made to understand these changes.

Send comments to The Editor