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30 Mar, 2010 15:29

Risk profile beyond bombings sets Russia apart for investors

The immediate reaction to Monday’s bombings by traders was to sell the rouble first, and then work out when to buy back in, reflecting Russia’s higher risk status when it comes to investment.

When it comes to business risks the key thoughts that pervade the minds of investors are political risks, social risks, infrastructure risks, and judicial risks. Sadly for Russia it ranks amongst the highest risks in nearly all categories, and that means that when further risks, such as terrorism, occur, the immediate reaction by investors is to look for the exit door and ask questions later.

The aftermath of Monday’s bombings saw both the Russian rouble and equities rebound strongly from an initial jolt with rising crude prices making the terror attack induced selling by some a buying opportunity for others. Oleg Vyugin, Chairman of MDM Bank believes that traumatic as the bombings were, against Russia’s general risk perception they will have minimal impact on Russia’s investment attractiveness.

”If this time the police and law enforcement will show that they are in a position to control the situation and take some measures that will be effective to avoid further events, then of course markets will forget immediately.”

But what investors and markets don’t forget are more serious risks, which cast a far more pervasive and negative shadow over those looking to invest in Russia. Russia is perceived as almost the last word when it comes to bureaucratic risk, judicial risk, infrastructure risk, and political risk, all seen to be negotiated to some extent with corruption.  This explains why Foreign Direct Investment into Russia runs at 1% of GDP – Investors simply can' be sure that what they are investing in will deliver the return on investment they are seeking.  

Russia is legendary for its corruption, ranking equal with Ukraine and Zimbabwe at number 146 globally according to the 2009 Transparency International corruption index.

2009 threats by Ikea to halt investment into Russia, centred around what it referred to as uncertain administrative process, with a range of bureaucrats seeking bribes for paperwork authorising compliance with Russia’s myriad of bureaucracies at Federal and regional levels. Russia’s legal system is also seen as prone to corruption making it the last resort for any company seeking redress against either officialdom or contract non compliance. From there potential investors need to consider the entire basis of property rights.

Ultimately this brings investors into considering the political risks. More than half the economy is owned by the state, and any investor looking to invest in Russia needs to consider whether the investment is either going to compete with a state owned entity, or rely on the service of one – potentially leaving the investor captive to more rent seeking behaviour. Large investors will almost invariably be doing both, and then they need to wonder if, when it gets to the bottom line, if those organisations are working to maximise profit or working to achieve a political outcome. If those political risks aren’t enough to consider the Russian legislative process is often seen as arbitrary and subject to whim adding to doubt about whether any given set of rules is likely to remain a constant.

Yulia Tseplyaeva, Head of Research at BNP Paribas Russia, says that against these risks terrorism is a lesser concern, and that Monday’s bombings are unlikely to figure largely in investment decision making.

“Terrorism risk is not among top ten risks in Russia when investors are making decisions whether to make an investment. Still it’s a much more bureaucratic pressure, uncertainty with rule of the game, uncertainty with property rights and only then Russia’s reputation as a place with unstable North Caucasus Region.”

One thing almost certain in the aftermath of Monday’s metro bombings is that greater attention will be paid to national security. Few would deny that Russia would be a better place if the risk of terrorism was as irrelevant for most Russians as the risk of drought, tsunami, or earthquake. But the business community, and the global investors they need to access to give Russia traction on an economic recovery, will be looking to see equally effective actions on far more serious investor risks.