Russia Forum Buzz: Investing in Russia: What Drives Investors Today?

April 18, 2013

 

There is a general acceptance that Russia is today a large market and has the potential to be a lucrative investment location, but the risk factors are still mainly balancing out the potential rewards. Foreign corporates cite bribery, corruption, poor rule of law and endless red tape as their main concerns, along with skepticism with regard to working with state-controlled companies. But the realities are different, as foreign companies are looking at growth opportunities in Russia, considering its huge consumer base, WTO accession and a president focused on reform, while the World Bank’s Ease of Doing Business ranking and OECD membership are longer-term objectives. How can Russia attract more foreign corporates to commit more capital and to stem Russian capital flight? Where does the panel of foreign and domestic corporate leaders see the challenges for Russia in this regard, and the areas to tackle that can make an immediate difference?

  • Ruben Vardanian introduced the panel and asked what made Russia an attractive investment destination and why it has had bad press. He noted that it was important to escape stereotypes and to focus on the reality of growth and change.

  • The question was asked to the room why some investors see Russia as worse than other markets. The split of answers was:
    – Legal vulnerability of investors – 33%

    – Lack of accountability of the elite – 24%

    – Lack of institutions – 22%

    – Projects not seen through – 11%

    – Absence of long-term investors – 7%

    – Control over cash flows – 4%

  • Mark Mobius: The key question is, why do Russians not want to invest in their own country, and why do they seek legal redress in London instead of Moscow? The treatment of minority investors at TNK-BP is indicative of the problems faced by investors today. In contrast, the treatment of minority investors by Chinese government-controlled companies has been excellent. In Russia, there is the fear that the government will use the companies it controls for its own purposes, not for those of minority investors. Companies run for minority shareholders are usually run more efficiently. The upcoming privatization program may help show that Russia is changing.

  • Leonid Fedun: Many Russian investors choose to put their capital abroad, as reflected by Cyprus, which is reflective of local concerns about the system. It is key that domestic money is encouraged to remain in the country, and the clear solution is the further development of the domestic pension system. Sectors without government control such as internet and mobile have been much more successful. Once the Russian government starts to grapple with the expected fall in oil supply at the end of the decade, a real discussion may start in the oil sector about deeper privatization.

  • Ivan Glasenberg: To develop large mines requires massive foreign investment, but big miners like Rio Tinto have not invested in Russia. Moreover, Russian miners themselves do not reinvest their money back into domestic development, which is a cause for concern. Russia is well located to get resources to China but needs to improve its infrastructure. It is also important to improve the legal environment. Russian companies need to reinvest in their own businesses, perhaps alongside foreign investors. The opportunities remain excellent, and if the issues are solved, investment will follow. It is often helpful for the government to be a co-investor, as that helps make major projects feasible, and this would work in Russia.

  • Arkady Volozh: Russia has a great domestic market, a well educated population and some of the largest technology companies in Europe. (It is notable, for example, that Yandex is one of very few companies that have been able to dominate the internet search market in their own country.) Much can yet be done with Russia’s excellent resources in the area of IT, and this could turn into a major area of exports.

  • Marc Samwer: He is extremely optimistic about the Russian market, as it is large, with high internet penetration, has a rising middle class, and is underpenetrated. Russia is likely to become one of the top five consumer internet markets in the world. The other attraction of Russia is that it is under the radar screen of big companies like Amazon, and private equity has been able to do less, so there is less competition. There are challenges, but they can be overcome, and his company has been able to set up its own highly effective logistics operation to handle ecommerce. Corruption is widely perceived to be a major issue in Russia, but it is actually far worse in many other countries, such as Indonesia. Moreover, it is possible for companies to avoid corruption and it is also possible for countries to stamp it out.

  • Igor Komarov: Foreign companies are able to bring useful skills and technology and increase the effectiveness of the workforce, the use of energy and the operations of Russian companies. It is an illusion to imagine that it is enough just to buy foreign machinery – much more change is needed. The government can often help businesses operate; for example Rostechnologies’ involvement was key in the elimination of criminality at AvtoVAZ.

  • David Bonderman: Russia is a large and attractive market as the consumer sector has grown from a low base to overtake most countries in Europe. However, as an emerging market it continues to have many issues. The West has a negative perception of Russia as a result of its position as a former superpower, and its flaws are always in the spotlight as a result, perhaps unfairly. He noted that in Russia, individuals often have personal control over government companies, while in China this tends to be more institutionalized.