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Russian Roulette: Doing business in Russia

Matt Brennan

Being the largest country on Earth, spanning over two continents and 9 time zones, Russia is never

going to linger too long away from the public eye. This bountiful Baltic nation has often beenmisunderstood in historys pages, and even the famous Churchill quote doesnt properly capture the

murky essence that is at the core of Russian history. Russia is not a mystery as Churchill claims,

rather a complex jigsaw where pieces have been purposely withheld by corrupt governments and

individuals of years gone by, and not all of these pieces have been able to be put back into place.

There are even still some tattered remains of the Iron Curtain, which have largely been kept out of

view from the world stage, but these are nonetheless ever present when the data of Russia is

viewed more closely.

Topic Rankings DB 2013 Rank DB 2012 Rank Change in Rank

Dealing with Construction Permits 178 180 (+2)

Getting Electricity 184 182 (-2)

Trading Across Borders 162 161 (-1)

Enforcing Contracts 11 12 (+1)

Index of Economic Freedom 143 144 (+1)Doing Business (DB) in Russia rankings. Source: World Bank

The Doing Business rankings (above) published by the World Bank, illuminate a gloomy silhouette of

the social context of doing business in Russia. The findings are a result of analysing 185 countries

worldwide on key business indicators and then comparing each countrys key matrix scores, which

are then ranked where number 1 indicates the best performing country in that category. Russia was

amongst the nominees in the category of hardest country to obtain electricity for household and

commercial use and only in Bangladesh is it harder to obtain electricity (Madagascar came in at

183).

Once power difficulties have been overcome, businesses then face the unenviable prospect of

dealing with the lengthy delays of Russian construction permits, where the government plays a

starring role in deciding what will eventually be built, unless of course businesses themselves have

the deep pockets to pay for priority approval. Interestingly enough, Russia scored 11th

overall in the

ranking of enforcing contracts. This is the cinematic expectation we have of Russians, as the villains

who are willing to break any and all of the 206 bones in the human body, if certain conditions of an

agreement are not met. This stereotype was engrained for a reason, possibly due to casting

convenience as much as historical resemblance, and regardless of whether this overzealous

stereotype is still relevant, it serves yet another reminder that the burden of Russias past still

weighs heavily on it today.

A positive aftertaste from the communist regime is that income equality is actually not as bad as

public perception would dictate. The Gini co-efficient is a score between 0 and 100 which represents

a countrys income distribution, where 0 is the utopian goal of total equality. Like Golf, the aim is to

achieve the lowest score possible, and this global scorecard ranges from countries that place high

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value on social welfare such as Australia and Norway with scores of 33 and 25 respectably and

tyrannical dictatorships in central Africa with scores of 60+ (without diving too deeply into the

functionality of a Lorenz curve, a score of 60 means that the bottom half of the population earns

roughly 9% of the nations wealth).* Russia has achieved a respectable par, with a Gini co-efficient of

40 which lies within the middle band of countries in regards to income equality.

Investing in Russia is very much like investing in options. Most of what is detailed above are just

some of the factors that in aggregate cause an investor to chafe at the thought of buying a stake in

Russia. However, these limitations are generally constrained, (ie; the electricity statistic takes into

account the whole of Russia, including remote areas, and the problem is unlikely to get any worse),

whereas the potential positives of investing in Russia are quite staggering. From a macro-economic

perspective, Russia ticks all the boxes of strong growth (4%p.a in the past 3 years within the current

economic climate), stable currency and interest rates, downward inflation rates and most recently

low unemployment (as depicted below). President Vladimir Putin (change in title from PM occurred

after he won the 2012 presidential election) has undergone a raft of micro-economic reform aimed

at targeting productivity, particularly in the financial sector, which combined with an increase in

utilisation of the Russian workforce, is a leading indicator for future growth. Oil shortages continue

to plague Western moral, and Gazprom, Russias leading and government owned (50.01%) oil and

gas giant, is set to capitalise on these fears and price spikes for many years to come.

Russian Unemployment

Hot to Trotsky: Unemployment has been diminishing for the past four years. Source: (Data Bloomberg,

Images - Google Images)

Even a rose has thorns and in the same way Russias painful past must not overshadow its dazzling

future. Investing in any of the four growth countries (Brazil, Russia, India and China) will always be

riskier and fraught with danger, but there is something irrepressible and striking about Russia in

particular which will make it a key hub when all of the jigsaw pieces have been put into place. The

song Moscowpopularized by German group Khan Dschinghis during Eurovision song contest in 1979

(it even placed #1 in the Australian charts the following year), showcases a hint of the audacious

swagger that characterises Russia as much in business as in life: Take Natasha in your arms, you'll

be dazzled by her charms, Moscow, Moscow, she will make you understand, that Russia is a

wondrous land.

*Gini co-efficient data obtained from the official CIA website cia.gov