Russian Roulette: Doing business in Russia Matt Brennan Being the largest country on Earth, spanning over two

continents and 9 time zones, Russia is never going to linger too long away from the public eye. This bountiful Baltic nation has often been misunderstood in historys pages, and even the famous Churchill quote doesnt properly capture the murky essence that is at the core of Russian history. Russia is not a mystery as Churchill claims, rather a complex jigsaw where pieces have been purposely withheld by corrupt governments and individuals of years gone by, and not all of these pieces have been able to be put back into place. There are even still some tattered remains of the Iron Curtain, which have largely been kept out of view from the world stage, but these are nonetheless ever present when the data of Russia is viewed more closely.

Topic Rankings
Dealing with Construction Permits Getting Electricity Trading Across Borders

DB 2013 Rank 178 184 162 11 143

DB 2012 Rank 180 182 161 12 144

Change in Rank

Enforcing Contracts Index of Economic Freedom

(+2) (-2) (-1) (+1) (+1)

Doing Business (DB) in Russia rankings. Source: World Bank

The Doing Business rankings (above) published by the World Bank, illuminate a gloomy silhouette of the social context of doing business in Russia. The findings are a result of analysing 185 countries worldwide on key business indicators and then comparing each countrys key matrix scores, which are then ranked where number 1 indicates the best performing country in that category. Russia was amongst the nominees in the category of hardest country to obtain electricity for household and commercial use and only in Bangladesh is it harder to obtain electricity (Madagascar came in at 183). Once power difficulties have been overcome, businesses then face the unenviable prospect of dealing with the lengthy delays of Russian construction permits, where the government plays a starring role in deciding what will eventually be built, unless of course businesses themselves have the deep pockets to pay for priority approval. Interestingly enough, Russia scored 11th overall in the ranking of enforcing contracts. This is the cinematic expectation we have of Russians, as the villains who are willing to break any and all of the 206 bones in the human body, if certain conditions of an agreement are not met. This stereotype was engrained for a reason, possibly due to casting convenience as much as historical resemblance, and regardless of whether this overzealous stereotype is still relevant, it serves yet another reminder that the burden of Russias past still weighs heavily on it today. A positive aftertaste from the communist regime is that income equality is actually not as bad as public perception would dictate. The Gini co-efficient is a score between 0 and 100 which represents a countrys income distribution, where 0 is the utopian goal of total equality. Like Golf, the aim is to achieve the lowest score possible, and this global scorecard ranges from countries that place high

value on social welfare such as Australia and Norway with scores of 33 and 25 respectably and tyrannical dictatorships in central Africa with scores of 60+ (without diving too deeply into the functionality of a Lorenz curve, a score of 60 means that the bottom half of the population earns roughly 9% of the nations wealth).* Russia has achieved a respectable par, with a Gini co-efficient of 40 which lies within the middle band of countries in regards to income equality. Investing in Russia is very much like investing in options. Most of what is detailed above are just some of the factors that in aggregate cause an investor to chafe at the thought of buying a stake in Russia. However, these limitations are generally constrained, (ie; the electricity statistic takes into account the whole of Russia, including remote areas, and the problem is unlikely to get any worse), whereas the potential positives of investing in Russia are quite staggering. From a macro-economic perspective, Russia ticks all the boxes of strong growth (4%p.a in the past 3 years within the current economic climate), stable currency and interest rates, downward inflation rates and most recently low unemployment (as depicted below). President Vladimir Putin (change in title from PM occurred after he won the 2012 presidential election) has undergone a raft of micro-economic reform aimed at targeting productivity, particularly in the financial sector, which combined with an increase in utilisation of the Russian workforce, is a leading indicator for future growth. Oil shortages continue to plague Western moral, and Gazprom, Russias leading and government owned (50.01%) oil and gas giant, is set to capitalise on these fears and price spikes for many years to come. Russian Unemployment

Hot to Trotsky: Unemployment has been diminishing for the past four years. Source: (Data Bloomberg, Images - Google Images)

Even a rose has thorns and in the same way Russias painful past must not overshadow its dazzling future. Investing in any of the four growth countries (Brazil, Russia, India and China) will always be riskier and fraught with danger, but there is something irrepressible and striking about Russia in particular which will make it a key hub when all of the jigsaw pieces have been put into place. The song Moscow popularized by German group Khan Dschinghis during Eurovision song contest in 1979 (it even placed #1 in the Australian charts the following year), showcases a hint of the audacious swagger that characterises Russia as much in business as in life: Take Natasha in your arms, you'll be dazzled by her charms, Moscow, Moscow, she will make you understand, that Russia is a wondrous land. *Gini co-efficient data obtained from the official CIA website cia.gov