Russia has never been the easiest country to understand. Winston Churchill described the country as a "riddle, wrapped in a mystery inside an enigma," and today a lot of investors would share his viewpoint.
TUTORIAL: Conference Board Indicators

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 Russia it is still possible to generate returns. The trick for investors is to understand Russia's opportunities and its risks.

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 Russia makes significant strides to tap into its natural resource pool and implements policies to reduce disparity, per capita growth is likely to show improvement as well. A GDP growth rate averaging 7% between the crises of 1998 and 2008 made it not only a large market, but a large market that was growing rapidly. While Russia has been the laggard of the so-called BRIC economies (Brazil, Russia, India and China), Russia has enjoyed plenty of foreign investment. (Emerging markets provide new investment opportunities, but there are risks - both to residents and foreign investors. Check out What Is An Emerging Market Economy?)

Natural Resources
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. Russia also has exposure to the energy industry through a number of key joint ventures throughout Africa and other energy producing nations. But oil and gas are not the only natural resources that are plentiful in Russia. The mining and production of precious and non-precious metals is an enormous industry in the country, with great promise.

That being said, energy and minerals are part blessing, part curse. Russia's heavy dependence on resources represents a risk. When you invest in Russia, you have to keep in mind the direction of commodity prices.

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.

Politics
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 Moscow office in 2008. Various other barriers on international corporations such as Carrefour and DeBeers have forced them to withdraw their operations in Russia. The Russian government has a record of putting pressure on foreign energy companies as part of its effort to consolidate control over the country's largest and most important hydrocarbon deposits.

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 Iran, Libya and Pakistan are perceived as having less corruption.

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 Russia offers high returns, it is dominated by energy companies, the state of regulations still under development, and there are political risks that are larger in that country than others. The striking feature of investing in Russia - the risks and rewards are both high. (Get the full story on this asset class before you write it off as too risky. Refer to Re-evaluating Emerging Markets.)

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Fundamental Analysis

    Is Brazil Currently in a Depression?

    Find out if Brazil, the world's seventh-largest economy, may have finally slipped into an economic depression, and learn the reasons why.
  3. Stock Analysis

    3 Reasons to Invest in Frontier Markets in 2016

    Learn why investing in frontier markets will be a great long-term investment as these markets grow in ways that will propel them to success in the future.
  4. Investing News

    Brazil's Latest Export To China: Soccer Players

    Why are Brazilian soccer players moving to China?
  5. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  6. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  7. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  8. Investing

    Will China Suffer a Fate Similar to That of the Soviet Union?

    Many parallels could be drawn between the former USSR and today's China, but the one similarity the CCP wants to avoid is the Soviet Union's collapse.
  9. Economics

    Governments Ask Tech Giants to Join War on ISIS

    In the US and Israel, governments have asked their respective nations' tech industries to help in the war against ISIS.
  10. Investing News

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
RELATED FAQS
  1. Is Russia a developed country?

    Though it once reigned alongside the United States as a world superpower, Russia is not classified as a developed country ... Read Full Answer >>
  2. Is Malaysia a developed country?

    Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Do mutual funds have CUSIP numbers?

    The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
  5. Who decides to print money in Russia?

    The Central Bank of the Russian Federation (CBRF), like its peers in most countries, is the governmental entity responsible ... Read Full Answer >>
  6. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center