Business weighs risks of Russian investment
AS the St Petersburg International Economic Forum wrapped up over the weekend, the business leaders and investors who flew into Russia to see President Dmitry Medvedev outline his vision for attracting foreign investment into the resource rich former super power were hopeful that reform is finally on the way, but sceptical that the Russian leadership will finally deliver on their promises to create a more business friendly environment.
Two of the UK’s biggest companies, BP and Shell, learnt the hard way that investing in Russia, while offering the chance of big returns, posed big risks when contracts turned out to be a process of negotiation, not a legally binding agreement as hoped.
Medvedev used his keynote speech to call for businesses from across the world to come to Russia, thereby reducing the country’s dependence on oil and gas revenues.
The chief of Swiss drug giant Novartis was in town to break ground on a new purpose built facility which has been made possible by Medvedev’s new inward investment programme. Joe Jimenez told CNBC the deal made sense, given the support he had received from the government and the relatively high standard of education in Russia.
The country’s economy is heavily dependent on oil and gas revenues which have created an elite for which money is no object. But the impact of high import taxes and a lack of locally produced goods has created some of the most expensive prices in the world. Whereas the rich can afford a £10,000 bottle of cognac, the average person is more likely to be drinking cheap locally produced vodka into the early hours.
Stephen Schwarzmann, the chief executive of the Blackstone Group, argued that there is a big Russian consumer society that could offer investment opportunities for the private equity giant, but believes the country will only become an attractive destination for foreign capital if the top 20 politicians in Russia decide to seriously battle corruption.
Medvedev sounded serious but there is still a long way to go before people will feel confident in the rule of law. “Due to a general lack of trust, many of the recent accomplishments of government, business and civil society are vulnerable. Institutions are not yet strong or independent enough, for example, to provide whistle-blowers with protection and provide companies subject to extortion with due process,” said Matthew Murray from the Centre for Business Ethics and Corporate Governance.
But while Russia is no western democracy, it has expected growth of five per cent this year and a president trying hard to attract talent. For those reasons, expect more firms and investors to take a risk on Russia.
Patrick Allen is a senior news editor for CNBC