Writers on Russian policies are mostly interested nowadays in the future configuration of the power vertical, i.e. relations between Putin and Medvedev who of the two gets the upper hand. This is indeed a crucial point but not the only one. No less important is agreement or lack of it between government and business on major future directions of policy in the economy and other spheres. In the final count this is what determines the development of the country and the success or failure of the government.

Medvedev's first high level meeting with top leaders of big business (so called oligarchs) occurred a few days ago in the Kremlin where Putin used to meet them while he was president. A dozen-plus of the richest Russian individuals from the 'Forbes' list were there controlling quite a chunk of the nation's GDP. The tone set at the meeting is somewhat like a barometer of current relations between government and business.

The atmosphere, to put it shortly, was neither amicable nor tense. For all the pro-liberal-Medvedev publicity of the last few months one could characterize the oligarchs' attitude as cautiously critical but expectantly hopeful. The rich crowd well remembers the Khodorkovsky shock delivered by Putin and also realises that the president-elect is a 'Putin man'. Experience tells them that the proof of the Medvedev pudding, like any other, is in the eating.

And so they started out with a barrage of recriminations complaining on cases of destructive government interference in business affairs. One case in point cited was a recent attempt to take over a private company running airport Domodedovo. Not only small and medium business but also large companies were allegedly being harassed by various government agencies.

Medvedev took these recriminations calmly and even suggested that civil servants guilty of harming private business should be taken to court and duly prosecuted. The audience greeted this approach as a step forward compared to the previous presidency. The president-elect also assured the oligarchs that he would take a more lenient view of cases brought against companies charged with breaking the law during privatization of government properties.

So far, so good. The first sign of discord appeared when discussing taxes. Business was adamant in demanding tax reduction, particularly bringing down VAT from 18 to 12 percent. Medvedev was favorable to the idea but wanted tax changes to be coordinated with his and Putin's long-term macroeconomic development program which is centered on maintaining fast growth, promoting innovation, investment and infrastructure. Business was disappointed that those programs were already formulated while government proposals on tax matters would be ready only by August. Its representatives claimed they could not plan ahead without knowing what tax rates would be like.

This looks like a technical disagreement on timing but the problem lies deeper. Business wants lower VAT but has little relationship to innovation and investment. The main beneficiary of low VAT are export industries which in Russia are hydrocarbons and metals, not high-tech manufacturing where innovation mainly originates. If the oligarchs have their way, there will be very little innovation, and Russia will remain a predominantly raw material exporter . This is, not surprisingly, were most of the oligarchs' business interests are situated.

Not mentioned at the Kremlin meeting was also another change prepared by the ministry of finance which would substantially cut taxes for the petroleum industry. This, of course, is one of the most profitable and in least need of a tax break. Not a pioneer in innovation, either. The logic of Russian tax policies at this juncture are hard to understand, indeed. Clearly, the finance ministry is at cross purposes with strategic macroeconomic plans laid out by Putin and Medvedev. Are the diarchs aware of this schism? Difficult to say.

What strikes one most is the absence at the meeting of any substantial discussion of ways to promote innovation. No one mentioned the need to focus on R&D making it a major item of business expenditure. Today even large Russian private companies, unlike those in the West, as a rule, spend very little, if anything on developing new products and technologies. At most, they would buy foreign patents rather than spend money on developing their own innovations.

This is going to change if the Putin-Medvedev long-term plan has any hope of seeing the light of day. So far, there are no signs that Russian big business is ready for this revolutionary change.

Another controversy at the meeting emerged on inflation. Once and again, Medvedev insisted that beating double-digit inflation was a top policy priority. But Oleg Deripaska, head and major owner of 'Rusal', Russia's private aluminum monopoly, ventured a different view. The currently richest man in the country said inflation was not that important. More harmful to the economy, he stressed, was the policy of a strong ruble versus the US dollar, which is undermining the competitive power of Russian exports.

While Deripaska is right on the exchange rate issue, he is dead wrong on inflation. That is if one has in mind the national interest and wellbeing of the people. For the oligarch-exporter, profit, not the national interest, is a prime concern. He probably should not have demonstrated it in public. But the fact that he did is significant. Higher prices mean larger profits but lower real incomes.

The conflicting interests are obvious and the government will find it difficult to tame inflation in such circumstances. Recently, current prime minister Victor Zubkov sharply criticized the finance ministry calling its anti-inflation policy ineffective. The ministry is working on a new program but its neoliberal ideology (shared by big business) bars it from using price markup controls, the only effective way to beat the price spiral. Are the diarchs prepared to take on business on this point, is not quite clear.

A war of words against government corporations has lately intensified in Russian business related press. Apparently, it thought it could sway Medvedev to its side against Putin on this issue. This animosity echoed somewhat at the Kremlin meeting, as well. But the president-elect took his usual middle of the road position: government companies were to be used where strategic interests were concerned and where private capital would not operate. They would be run on market principles and would be privatized at least partly after they become competitive in world markets. He said there was no intention of making government corporations a general practice.

Medvedev'a statement did not allay business criticism of state capitalism. The reasons for this insistence are not quite clear. Apart from oil, there are no industries where government companies directly compete with private business. There are no serious reasons why the government should not use available excess financial resources to help industries in distress but or strategic importance to the nation. It looks like the objections from business are largely motivated by ideology or envy, and that spells permanent friction between the oligarchs and the diarchs. Another lasting cold war within the Russian elite.

And certainly a bad omen for the incoming president.