Russian Federation: The United States Is Missing Out On The Russian Evolution

In July, world attention focused on Russia, as the Group of Eight summit convened in St. Petersburg. Russia was invited to join the G8 in 1998 both to recognize and to encourage its transformation to a market-based democracy. It’s been 16 years since the Russian Federation formally declared its independence from the Soviet Union. In that times, a series of remarkable transformations have occurred, yet perceptions of Russia in America – from government, media and, not least, business – have not kept pace with reality.

Having spent more than a decade living and working in Russia, I am amazed at how Americans still misunderstand the situation on the ground here. Perhaps they’re blinded by Cold War prejudices or simply prone to outdated visions of Russia as the Wild East. The truth is that Russia is open for foreign investment and American businesses are missing out on tremendous opportunities.

Businesses often make two mistakes when evaluating Russia as an investment opportunity: they view unique cause célèbres as representative cases and they don’t appreciate the extraordinary changes made since the 1998 financial crisis. Americans, for example, are too apt to view the State’s seizure of the assets of Yukos, the country’s second-largest oil company, and imprisonment of CEO Mikhail Khodorkovsky, as proof of Russia’s disregard for the rule of law and irreparable weakening of civil society. The Kremlin’s action was a crudely executed response to the oligarchical excesses of the Yeltsin era and should not be viewed as representative of any governmental trend toward business in general.

Whatever missteps have occurred along the way, the rule of law increasingly is respected as the foundation governing Russian society, and foreigners’ rights are being recognized and protected under Russian law – on paper and in practice. That was not the case in the immediate post-Cold War era, a time of great promise but also of tremendous political and economic mismanagement, which triggered the economic crisis in 1998. Many foreign investors lost faith and exited Russia then. But the Russian government moved quickly to address the major problems underlying the instability, including widespread corporate abuses, by amending the main corporate, bankruptcy and securities laws. It strengthened shareholders’ rights, increased transparency and approved clearer laws that ensured greater stability.

The Putin government has adopted measures – currency stabilization, tax reform, controlled inflation, an expanding service sector and increasing exports, among others – that have contributed greatly to political and economic stability unimaginable in the 1990s. Real economic progress is having far-reaching positive effects on the Russian and world economies. Domestically, President Putin enjoys favorability ratings of around 70%, largely reflecting these stabilization measures.

Russians today are enjoying unprecedented levels of comfort, confidence and security. Russia ended 2005 with its seventh straight year of growth and this year the government expects to run its sixth straight budget surplus. To be sure, high oil prices and prices for other natural resources are pushing much of this growth, but consumer demand and foreign investment are driving the economy as well.

Indeed, foreign investment has boomed recently, and for the first time capital inflows exceeded capital outflows. Indeed, nearly half (US$54 billion) of the US$112 billion in accumulated foreign investment in Russia was invested in 2005 by foreign investors, according to Russian state statistics. Those investments are paying off handsomely. The Russian stock market surged in 2005, with the RTS Index nearly doubling, although the market here (like all emerging market exchanges) has taken a hit recently as a result of global volatility unrelated to Russian risk.

In addition, initial public offerings of Russian companies’ shares also helped them attract about US$6 billion last year versus US$700 million in 2004. Unfortunately, the timidity of American investors, who invested only about 6.5% of such foreign investment, is leaving American business and stock exchanges trailing the pack of those who recognize the opportunities in this expanding market.

American companies simply cannot afford to wait for Russia to evolve further. Yes, Russia absolutely should continue to do more to address such issues as corruption, corporate raiding and freedom of the press, but investors’ rights are being recognized, protected and enforced here, and foreign investors outside the U.S. are profiting because of it.

I hope that American businesses are able to rethink the evolution that has taken place in Russia and begin to take greater advantage of the strong business climate that does exist – and leave behind certain outdated impressions.

Note: This article first appeared on August 23, 2006 on Law.com as part of its IN FOCUS series.