The World Bank and the International Monetary Fund have sent Russia mixed signals recently. Combined, the global financial bodies are cautiously optimistic about the country's current and future economic performance, although for different reasons.

Both the Bank and the Fund focus on what's holding back Russia's economy and what can send it soaring. To sum up, there is less capital flight but foreign direct investment remains abysmal. This is President Vladimir Putin's most pressing economic challenge.

The IMF signaled that capital flight from Russia has started to subside – down to $5 billion in 2001 from $20 billion at the end of 2000. It's too early to discern a trend, but this decline clearly reflects the stabilization and greater predictability of the economy under Putin.

But while capital flight may be tapering off, there is no sign the money is destined to return here anytime soon. This should not come as a surprise: Making money and getting it out of Russia is hard enough, and Russian businessmen understand the difficulty of doing both probably better than any Western investor. Incentives have been put in place to slow the flight, but not to bring it back.

Around the same time as the IMF weighed in, the World Bank warned Moscow that without a significant increase in capital investment Putin's directives to accelerate economic growth most likely would not become reality. Some facts and figures should suffice to prove a number of points. Between 1994 and 2001, Russia received, per capita, one-sixth the level of Poland's foreign direct investment, one-eighth of Hungary's and one-fourteenth of that of the Czech Republic. Stated differently, since 1994, in absolute figures, the Russians have received about $165 per capita every year, compared with $889 for the Poles, $1,245 for the Hungarians and $2,238 for the Czechs. Russia, on a monumental scale, clearly lags behind its emerging-market peers.

Of the Russian total over the past decade, 38 percent of all foreign direct investment has been in Moscow. The oil and gas sector has been favored, but food processing even more so. Over the past decade, the transportation sector attracted slightly less than oil and gas. While investment overall has been paltry, there is clear evidence of a rise in interest in the country's consumer market, not just sectors involved in the export of raw materials.

Where does the trepidation of foreign investors come from? Of course, the issue of corruption always arises. There is good reason why it does, but two other fears discourage investment in Russia even more – and both shed light on the reason for capital flight. The tax environment and the state bureaucracy are the biggest barriers to direct foreign investment. The problem is embodied not by thugs in leather coats but rather by the government. A recent study by the Anti-Monopoly Ministry of management of foreign businesses already working in Russia says as much.

First and foremost, it is the tax regime that thwarts foreign investors. Actual taxes are perceived to be too high and subject to sudden change. This is to be expected during a period of legislative transition. The government, including regional authorities, is aware of the opaque nature of the tax system. The biggest problem is not legislation that has been enacted during the past decade, but its harsh, often arbitrary, enforcement.

On the second point, Russia's bureaucracy remains a black hole – alien to the very nature of business and receptive to patronage. The bureaucracy manipulates regulations, plays favorites and is creative in implementing the laws on the books. Often, bureaucratic structures invent their own rules. Though this is clearly illegal, it can take years for a domestic court to make such a finding. It is incumbent on Putin and his government to face these issues head-on if they expect foreign investment or repatriated funds to enter the Russian market.

There is corruption and then there is corruption. The existing perception of Russia suffers from a lag period. Beyond Russia, there are numerous books and accounts of the wild 1990s. Indeed, they tell an important and frightfully sad story of that decade. For Russia, the '90s are ancient history. What is often overlooked is the fact that many Russian businesses have vastly advanced beyond the unreformed Soviet bureaucracy still in place that makes each even more alien to the other. If the term "uses of adversity" ever had meaning, it applies to first-generation Russian businesses. These are the people with whom foreign investors need to establish partnerships. They know the ropes and what the concept of a level playing field means. The bureaucracy may be inept, but the police are predatory.

Doing business in Russia remains a function of dealing with the state and "in-the-know" entrepreneurs. Many businesses are up to speed and more than willing to conform to the strictest Western financial controls. Sadly enough, Russia's bureaucracy cannot see the sign of the times. Over the past 10 years or so, many Russian businesses have cleaned up their act, but the bureaucracy still looks for a handout, with little regard for the national interest.

Putin will surely put to use the findings of the World Bank and the IMF, but will his bureaucracy listen and be receptive? His next great challenge is to make them listen and apply the pressure for which he's known.

Peter Lavelle is a Moscow-based analyst.