Russia – The Near Future Outlook Looks Bad

Russia has been making the news a lot recently and very little of it good. Beginning with the Ukraine standoff, and most recently the possible implication of Russia in the downing of the Malaysia Airlines MH17 Boeing 777, Russia is rapidly becoming a pariah nation. Even just prior to the Ukraine standoff, the Russian economy was  not doing well at all. Of the five BRICS nations, during the past few years, Russia had the among the lowest growth rates and even experiencing contractions in its GDP.  Now, with current sanctions and the likelihood of more sanctions, even doing business in Russia will become problematic, to include imports and exports. While it is unlikely the West will cut off Russian oil and gas exports due to the severe repercussions that move would have on Western Europe’s economy, it is highly likely Western Europe will actively seek to gradually wean off of Russian energy exports and seek alternative sources. Further, even foreign businesses involved in the oil and gas sector could be pressured not to supply Russia’s energy sector – or even outright forbidden by potential new sanctions in the future. Please note, there haven’t been any new sanctions yet on Russia’s energy sector. The most recent sanctions covered large Russian financial institutions (which would make foreign direct investment problematic since it’s often required to establish accounts with national banks and doing so under sanctions would be illegal). The Russian economy is highly export-driven, relying almost exclusively on its energy exports, with very little else in exports, in spite the Russian governments efforts to form a competitor to Boeing and Airbus. The consumer sector is fairly weak for an economy the size of the Russian Federation.

It wasn’t that long ago, Russia seemed to have bright prospects. While GDP growth wasn’t double digits, it was very high compared to the developed nations. Its growth rates were fast enough it was included in the leading emerging markets of Brazil, China, and India to form the BRIC nations (South Africa was added a few years ago making it the BRICS nations). Even this year, its GDP grew into the top 10 to number 9 at $2 trillion. On the surface, Russia seemed to be a great place to both export to, and to expand business. Having recovered from terrible times in 1998, Russia experienced robust growth. But, even during then, Russia had and still has today a massive problem with corruption. As of 2013, Russia ranks at 127 out of 177 ranked nations. Further more, Russia is very authoritarian, with a very low freedom rankings, particularly recently as Putin has consolidated his power, stifled free media, and stamped out any opposition. In addition, Russia has a very high wealth inequity, helpful for businesses in the luxury market or in the low end market, not so much for those who’s business reaches middle class. With prospects of new and more severe sanctions, high levels of corruptions, it is not recommended businesses look to Russia at this time. If businesses choose to do business in Russia, it is highly recommended they first are in compliance with any sanctions in place, second, do extensive due diligence, and establish highly trusted contacts inside Russia.

This report does not intend to suggest Russia cannot ever be a good place for businesses. Countries change, political systems change. The Russian people are notorious for their resilience and endurance. It is possible longer term down the road, conditions in Russia will improve. But the Russian government needs to ramp up (start at the least) its crackdown on corruption, loosen control on civil liberties, and implement policy reforms to create a stable and favorable climate for business. For now, it is best that Russia is avoided for business.

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