The Emerging Market in Russia - dummies

The Emerging Market in Russia

By Ann C. Logue

Russia is the world’s largest country in terms of land and has an emerging market to match, although it doesn’t have as much foreign investment as many other emerging markets.

After the dissolution of the Soviet Union in 1991, Russia experienced dramatic changes, and after the government defaulted on much of its Soviet-era debt in 1998, the economy strengthened dramatically.

Essential facts about Russia:

  • Type of government: Federation

  • Major industries: Agricultural machinery, tractors, and construction equipment; all forms of machine building, from rolling mills to high-performance aircraft and space vehicles; communications equipment; complete range of mining and extractive industries producing coal, oil, gas, chemicals, and metals; consumer durables, foodstuffs, and handicrafts; defense industries, including radar, missile production, and advanced electronic components; electric power generating and transmitting equipment; medical and scientific instruments; road and rail transportation equipment; shipbuilding; textiles

  • Currency: Ruble

  • English-language newspaper: The Moscow Times

The pros of doing business in Russia

Even 20 years after the fall of the Soviet system, some amazing opportunities are ahead for Russia:

  • Educated population: The Russian education system is excellent. Almost 43 percent of Russian adults are college graduates, and almost 90 percent of high school students graduate. Russia has one of the world’s highest literacy rates, so most of the people can function in a modern economy. The country has people who can do whatever work needs to be done.

  • Rich natural resources: One of the world’s leading producers of oil and gas, Russia produces iron ore, bauxite, and gold, too. Russia has rich agricultural soil and is a net exporter of grain and timber.

    Russia can sustain its own people, and it can provide food and materials to other nations. The growth in India and China creates demand for Russia’s resources.

  • Strong financial system: After the 1998 default, the Russian economy was completely restructured. Russians concentrated on making their own system strong in the absence of outside investors, and with banks taking a hard line on risk, Russia made it through the 2008 global financial crisis with no problems.

Risks of doing business in Russia

Some Russians complain that international investors focus too much on Russia’s risks while ignoring similar risks in other markets. For example, Russia gets demerits because it repealed of many of the glasnost-era freedoms but China’s repression is overlooked. The Russian resentment is probably valid, but even so, Russia has plenty of risk:

  • An aging population and brain drain: The average age of the population in Russia is 38.5 years, and the birthrate is below the replacement rate. This situation raises the question of whether Russia will have enough workers to support its retirees and enough workers and consumers to support a more diversified economic base.

    On top of the declining birthrate, Russian scientists and engineers have a long history of leaving for greener pastures in other countries.

    However, as Russia’s economy becomes more stable, the people will feel more confident about the future, which in turn will boost the birthrate (the government already pays a bonus to women who have a second child) and lower migration.

  • Corruption and crime: Like many formerly Communist countries, Russia has a long-standing culture of corruption because that’s how people got things done. That corruption scares off foreign investors. Furthermore, Russia had a bit of a lawless era after the Soviet government fell, and organized criminals stepped into the void in many cities.

    The government has been addressing the issue, and if investors notice a real change, Russia will become a more attractive place to do business.

  • Reliance on one key industry: The Russian economy is based on oil and gas. That’s good because global demand for carbon-based fuel is huge and growing. However, by being so narrowly focused, the Russian economy is directly exposed to price fluctuations. Also, the planet’s oil and gas will be used up someday. The lack of diversity in Russia’s economy creates a big challenge over the long term.

    On the plus side, Russia has the potential to have a more diverse economy. It has a range of natural resources and geography, and its people are talented. Diversification should happen.