Investing In Russia: A Risky Game?
It's still hard for many investors to shake their memories of the Soviet era. Blame it on the heavy-handed government and crony capitalism. Nonetheless, in
Bust to Boom
For investors, Russia has ample economic and market growth opportunities. Since devaluation of the rouble and Russia's financial crisis in 1998, growth in Russia has increased steadily to keep relatively on par with other dominant emerging markets such as Brazil, India and China. Equity markets in the country have soared. Between 2005 and 2010, the Russian stock exchange has delivered steady double-digit returns to investors, and the country's performance is expected to continue showing sign of improvement.
Russia has one of the largest populations in the world - around 150 million people - many of whom have been getting slowly wealthier for the past decade and are spending an increasing amount of their income on luxury goods, services and holidays. A 2010 per capita GDP of approximately $16,000 puts it in the higher reaches of upper middle-income countries. As
Plentiful natural resources represent Russia's biggest draw for investors. Oil and gas play a major part in the Russian economy in terms of production for internal purposes and exports. In 2010 the country had nearly 80 billion barrels of proven oil reserves and tops the world's rankings for natural gas.
That being said, energy and minerals are part blessing, part curse. Russia's heavy dependence on resources represents a risk. When you invest in
It is a very resource rich country, not only in hydrocarbons and minerals, but also in terms of human capital, talent and education, Russia's Soviet tradition of education - superb in math and the hard sciences, excellent in languages - still produces plenty of brainy workers. Russia has an astounding 99% literacy rate and approximately half of the country's citizens have some sort of post secondary education.
Russian politics may represent the biggest investment risk. Take Yukos, arguably one of Russia's biggest and most successful oil companies. In 2003 its CEO, Mikhail Khodorkovsky, ran afoul of then-president Vladimir Putin and Russia's courts convicted him on trumped-up charges that resulted in an eight-year jail sentence. Yukos was forced into bankruptcy, and its pieces were sold off at a discount to Putin's allies for fractions of the actual market value. Yukos shareholders lost their shirts in the affair.
Russia has at times even made it difficult for foreign investors to operate in a environment free from bureaucratic pressures. For example, in an attempt to persuade shareholders to sell their stake in the TNK-BP joint venture, police raided BP's
Corruption and Lack of Governance
Corruption and weak corporate transparency is another major ongoing risk for investors. Many analysts admit say that this is a big problem - particularly among some of the smaller companies, whose accounts are not particularly transparent.
Even well-known and respected companies like Ikea which heavily focus on practicing ethical businesses activities declared a moratorium on subsequent Russian investments due to the ongoing concerns of corruption. Based on the Corruption Perception Index, Russia has a lot of obstacles to fair and efficient business practices. Even
The Bottom Line
As they seek investment opportunities around the world, investors need knowledge of the national risks that may threaten their investment. We all know that the high returns come from high risk investments and emerging markets are the likely area to find returns that outperform those of the developed nations. While