Where to Invest Next: the R in the BRIC
Winston Churchill called it "A riddle wrapped in a mystery inside an enigma” but others are calling it the next hot emerging market. Russia is slowly becoming a strong member of the BRIC countries and is the sixth-largest economies in the world and one of EU’s largest trading partners. It recently started a process of prioritizing economic restructuring and macroeconomic stabilization and as a result, created a strong financial system which opened the economy to international trade and investments. So what makes Russia a candidate for the investment hotlist?
Foreign direct investments in Russian economy increased by almost 40% between January and June this year, which translates into 27 Billion and is expected to continue growing. Some major companies such as Pepsico, Coca-Cola, Danone and General Electric are all expending in Russia
Russia shares land borders with fourteen countries and is close to Alaska, Sweden, Denmark, Turkey and Japan which makes a convenient location for international trade and investments. Some recent changes in Russia’s visa regime made it easier for foreign investors; the EU is set to get five-year professional visas while the US will get tourist and business visas for three years
The biggest draw for foreign investors is Russia’s natural resources. Russia is the largest country in the world and the richest in raw minerals which equals significant inputs for an industrial economy. Russia controls 20% of the world’s production of oil and natural gas which makes it self-sufficient in energy. Its mining and quarrying industries rank very high with massive amounts of iron ore, coal, lead, magnesia, nickel, titanium, copper, phosphate, diamonds and gold. It also have one-fifth of the world’s timber and wood in Siberia and the largest amount of fresh water of any other country in the world.
Russia is considered to be one of the world’s two energy superpowers (along with Saudi Arabia). Although it is the world's fourth largest electricity producer, renewable energy in Russia is still undeveloped and since this is one of the fastest growing industries today, investing in renewable energy in Russia is a good bet. Russia’s size implies a strong development potential for renewable energy: it has more unpopulated land than any other country which can be used for solar panels or wind turbines and largest amount of water that can be used for hydroelectric power.
2014 Winter Olympics and 2018 World Cup
Russia is in need for foreign investors in different areas for the Sochi winter Olympics: Sport and business facilities, infrastructure, hotels and service cluster. The Russian government called for foreign investors and as of now, there is almost as twice Dollars than Rubles invested in the winter Olympics.
The government announced that companies participating in the Olympic Games can count on long term loans for 7-10 years, tax relief and long term leases of land. Foreign investors are also invited to participate financially in different projects that are still in the need for investors: hotels, power plants, ice arenas, mountain range, and Olympic village.
Russia is also scheduled to host the 2018 World Cup which is a great opportunity for investors and shareholders. Both these events mean that Russia will have to partially depend on private and foreign investors for the next seven years which opens a wide window for investment opportunities. Russia will also have to develop its language capabilities through all sectors which mean that foreign language teachers will be in high demand in the future.
Russian Silicon Valley
Russia is going through a tech boom and is now in the process of building its version of Silicon Valley in the goal of importing ideas and technology from the west. The Government is building “Skolkovo Innovation City” just outside of Moscow, aiming to create a free entrepreneurial zone and attracting investors and entrepreneurs from Russia and abroad. The project cost is estimated at 4-6 billion Dollars.
Russia’s known top education and emphasis on research is turning these capabilities to the commercial area which results in talented scientists and advanced research. This is the best time for businesses based on intellectual property to go into Russia and many international companies are already taking part and opening research labs on the premises. Microsoft, Google, Cisco, Boeing and MIT are just a few of the Skolkovo center new residents. An advanced engineering Graduate school operated by MIT is also a part of the project as well as the Skolkovo international school of economics which is a Stanford school model and is run in English.
Investing in the Russian Stock Market
Although it is considered risky and although it has been lagging behind the other BRIC markets until now, Russia still holds interesting investment opportunities. Russia holds a slower growth rate comparing to the other BRIC markets but this is due to lack of force in labor force. Russia’s population is around 145 million so it can’t compete with China or India’s growth rate. However, Russia compensates for that with a higher productivity and investment growth and is way ahead of China, India and Brazil on GDP per capital levels.
As a result, a growing middle-class consumer is growing along with options to buy stocks in Russia through the growth of consumers. Russian stocks can be bought through foreign stock exchanges and some options for good stocks to buy or follow are Sberbank and bank VTB, Wim-Bill-Dann, Magnet which is one of the largest Russian retailers, Nvidia which is consumer electronics retailer (a still unpenetrated market with double-digit growth rates). Investing in Russian real estate is still considered risky.
Risks of Investing in Russia
Some companies such as BP and De Beers, did a u-turn and left Russia and investors find it challenging at time because of corruption, abuses of the courts, political issues and the lack of a truly independent media. Old-time investors say that Russia is still a good market for investment but investors need to know what to expect and be prepared. Business negotiations in Russia require patience and the use of reliable and well-connected mediators and legal counsels. It is also safer to invest in e-commerce than in physical goods which makes your business more vulnerable.
1) LA Times: In Russia, Climate of Fear is Stifling Innovation
2) Modern Russia: GE Boosts Foreign Investment in Russia
3) NBC: Investing in Russia's Tech Boom
4) Fool.co.uk: Where to Invest in Russia?
5) Venture Beat: Investing in Russia? Better Hire Bodyguards and Hunker Down
6) En.rian.ru: Foreign Direct Investment Up 39 pc in H1 says Putin