From the reign of Ivan the Terrible to the tumult of the Russian Revolution, from Glasnost to the fall of the Berlin Wall, from Lenin’s silver tongue to Putin’s icy stare, the West has historically viewed Russia and its leaders with a mixture of apprehension and distrust.
“I cannot forecast to you the action of Russia,” said Winston Churchill in 1939. “It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” If Churchill was confused, then the average Westerner should not be faulted for having a limited understanding of Russia and its people. But this lack of insight has only increased Western misigivings about Russia. In a recent conference call, News Corp. chairman and CEO Rupert Murdoch said, “The more I read about investments in Russia, the less I like the feel of it. The more successful we’d be, the more vulnerable we’d be to have it stolen from us.”
The collapse of the world economy and shrunken credit markets have already raised the bar for offshore deal-making in foreign markets, even apart from the usual geopolitical risks. And while these conditions may have led to concerns of being overly cautious, stereotypes and rumors of black markets, government conspiracies, and FSB (formerly the KGB) abductions all serve to reaffirm Russia’s reputation as a perilous place to conduct business. Fearing they will regret a crucial misssed opportunity to unlock hidden value in a downtrodden economy or take advantage of attractive cost savings, some directors may be reluctant to permanently write off Russia as a lawless and dangerous quagmire. After all, Russia’s population is around 140 million and highly educated, though not overly wealthy: the country’s GDP was ranked 8th worldwide in 2008, at about $1.8 trillion. Russia’s vibrant middle class is a source of both spending and labor that should not be ignored. Indeed, with other economies like China and Japan in constrained circumstances and potentially becoming more protectionist, it may be time to give Russia a second look, albeit with a careful eye. With the ruble at an 11-year low, foreign buyers are finding that land, labor, and material costs are at advantageous levels. Provided a company understands the risks and conducts thorough due diligence, now might be the time for executives and boards to rethink their Russia strategy.
From Dollars to Rubles
Since opening its doors to the West in 1991, the Russian government has gradually coaxed foreign capital to its shores. Putin and company attracted about $50 billion of international investments in 2007, or about five percent of the country’s GDP that year. “For Russia,” explains Oleg Shvyrkov, associate director with governance services of Standard & Poor’s, “access to international capital markets is very important for improving the economy, so the government is earnest in meeting the needs of international investors.”
Though the outlook has dimmed for energy-heavy Russia, which suffered when crude oil prices plummeted in the summer of 2008, the seesaw will inevitably swing back, much like it did following the country’s 1998 economic collapse, says economics professor Barry Ickes of Pennsylvania State University. “It all comes down to worldwide demand. Once oil comes back to around $80 a barrel, Russia will regain its footing.” Though Russia is now at a low point, successful venture capitalists, entrepreneurs, and other business pioneers have always demonstrated that the smartest moves sometimes can be those that seem to defy conventional wisdom.
Party Pipelines
The big profit-earner—and the crown jewel of Russia’s economic prowess—is the energy industry, which many Western companies have been tempted to enter. Russia’s oil and natural gas production makes up the bulk of the country’s domestic revenues and its international position of economic power. (Russia is the world’s largest natural gas supplier and its second-largest oil supplier.) Oil and gas alone account for more than half of the RTS exchange, and for this reason, Russian energy developers—and, of course, the government—are reluctant to allow Westerners a piece of the market, even at the expense of the nation’s own financial gains. “For the Russian government,” says Ickes, “control of the [oil and gas sector] is more important than Western money.”