Russia's Risks

Russia's Risks

Investing in any country will have risks. The Eastern European Countries are extremely risky, when compared to Western Europe. Most specifically, Russia is an especially high risk country. The future of Russia cannot be accurately predicted. We can look at Russia's past, and at the present options and analyze them, but we cannot however, predict what will become of Russia in the future.

Russia's history is full of strong central government, and the Russian People are accustomed to having this powerful government figure in their lives. Without a strong government the citizens of Russia seem to become mindless. The Russian Soul seems to be trained to obey and serve, rather then act independently. The free spirit so commonly found in Americans today, seems to be a rare commodity in Russia. Their people are dependent upon authoritarian figures for direction and decision making.

The old Soviet Economic System, known as the plan, failed because no one cared about it. No one owned it, and therefore no one felt responsible or at risk. The self interest that motivates people to protect, and work for the market was not there. The Russian people knew that they would be taken care of, and they did not feel the need to support the plan.

With this system, a central planning agency, the government, came up with a plan. It was in their economic best interest to minimize their production output, and to maximize their inputs. In other words, people should waste as much as possible, and hoard resources. They said, "We pretend to work. They pretend to pay us." The plan failed miserably, and there was no real progress in the economy. Stealing became the national sport because Russians felt that unless they stole it, it would go to waste.

All throughout Eastern Europe poverty could be proven the result of depressed internal markets. The people had nothing therefore the market had nothing. Russia was the first country to become Communist in 1917, followed by many countries such as Mongolia and Cuba. When Russia crumbled, the same leaders remained in power, even though the government had gone through many changes. This became a main reason that Russia was a semi-failure case among the Eastern European Countries.

Since Russia's fall and attempted reformation, there has been an increase in the death rate, and a decrease in the birth rate. Russia is dying off. It has been shown that in societies that switch from a non-market system, to a market system, there is a cultural shock, which leads to the self destruction of society. This can be seen in Russia, as well as other societies, such as Native American Indian populations.

Although it is impossible to accurately predict Russia's future, there are really only four different options for the future of Russia right now. They range from mass destruction to a miraculous recovery. There is the Two-Headed Eagle, the Long Goodbye, the Russian Bear, and Chudo. They are all unique, and possible, but each requires different circumstances.

First we have the Two-Headed Eagle, which is the symbol of tsarist Russia that is intended to have two meanings. "First, it is a non-Communist but relatively conservative government, which faces cautiously both forward toward a state-managed dual economy, and backward toward the collectivist and industry-centered values of the past. Secondly, the Two-Headed Eagle is the heir to the centralizing, Great Power traditions of the Russian past, and it is government of a Great Russia that wants to catch its breath, recover its pride, and reassert its interests. It is, first and foremost, a government of consolidation, warmly welcomed by many Russians after a decade of continuous political and economic upheaval." Due to Russia's past tradition of strong central government, the Two-Headed Eagle seems to be the most realistic option for Russia today. Things can, and probably will, get worse before they get better with the Two-Headed Eagle. But the people of Russia are ready for a change.

Then there is the Long Goodbye, that says that Russia is not going to be able to stay together much longer, and predicts a break up. This idea seems to be a little senseless because although the individual territories might have their own benefits, and be able to survive on their own, they most likely will not want to put out the effort to break free. Each region has its own unique qualities that make it more rich and powerful then Russia as a whole, which is weak and crumbling. However, the region of Russia as a whole has a strong bond, and will most likely stay together.

The Russian Bear also predicts more breaking up of Russia into small regions, but this theory is different in that it predicts that Russia will plummet to nothingness before it recovers. This theory predicts a civil war, and an anti-western military force. After this corruption, and then Russia will return to an authoritarian and communist system before finally heading towards a capitalistic system.

The Chudo Theory is the miraculous one. The theory predicts tremendous growth of the democratic free market. This theory is a bit confusing because of how unrealistic it comes across. It predicts a dramatic recovery of all the failure of the current system, where democracy will suddenly prevail over all else.

Of the four possible outcomes of Russia the Two-Headed Eagle is the most plausible and realistic one, mostly because of the fact that Russia has a long standing tradition of strong central governments. The Russian people have typically had a government that dictated their actions at all times. To progress towards a free market system, the Russian people will need a strong central government to help them get moving.

All of these theories have the possibility of risk for investors. In 1996 the black market accounted for 40 percent of Russia's gross domestic product, while it accounted for only 5 to 7 percent in Western nations. Investors felt uneasy about investing in Russia because of the federal deficit, crime, and corruption. Many investors made profits during these same time periods, including Scott Nicol, who founded ClearWater drinking water company, and James Weinstock, who opened a Gold's Gym. "You don't just think long term in a place like this. There's no way anything could be as exciting or rewarding as what we are doing here. We're actually defining a market, we're creating it!" It can be seen that investing in Russia can be profitable, but it must also be known that adaptability is a key part to survival.

Investing in Russia can also be extremely dangerous, as Paul Tatum learned the hard way. On November 3, 1997, Paul was walking to the subway with his bodyguards and was shot 11 times from behind. This was no accidental shooting. This was a contract killing. Organized crime in Russia is a large part of business these days. "It's almost as if organized crime is an accepted way of life." It is important that companies know when it is time to walk away, no business is worth dying for.

Investments in Russia should then perhaps be considered option premium. Although investors have everything to gain, they also have everything to lose, and most options expire unexecuted. The foreigners who went into Russia when everyone else thought it was still a basket case have benefited rightfully.

One main worry for investing companies is the lack of legal structure to protect investments. But with the new civil code and the new Federal Commission on Securities having established a legal framework on paper, the economy and the ruble have stabilized. The future of Russia seems to shine brightly. Especially when one looks at the potential of Russia's resources. "Russia contains more energy reserves than Iraq and Iran combined, and only South Africa can compete in producing gold and diamonds. … If the politics stay reasonably stable, a country that is self-sufficient in food, awash in oil and gas reserves and other raw materials, has got to be a sound bet for the future. The problem is, the Mafia knows it too."

Many U.S. Fortune 500 companies have already invested in Russia, such as, Chevron, Texaco, Coca Cola, Pepsi, Bank of America, Hewlett Packard, IBM, Johnson & Johnson just to name a few. It seems that now is the time to invest in Russia. Although the risk can be great, the risk is well worth it. Russia is coming to its senses, and the people of Russia are ready for a come back. This time a comeback with a free market. Investing in Russia would be a good move for a company willing to take the risk.

However, companies choosing to invest in Russia must realize that Russia is not a utopia for profits. Russia comes with its own set of standards, some of which involve the Mafia and organized crime. Investors need to know when it is time to step out of the game. Investing in Russia can bring back great results, but at the same time can cost one his/her life. The key to success in Russia is being able to adapt quickly, and knowing when it is time to quit. Beyond that, everything is a matter of smart decision making.

Bibliography

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7. Klebnikov, Paul, "Moscow Cowboys," Forbes, Dec. 16, 1996, v.158, n.14, pg.78

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