The Russian Risk

June 17, 2012
I have told many groups over the last year to be worried about stability in Russia. The economy has certainly been doing well, and many firms are making money; yet the societal underpinnings made me nervous. First, the strengths of Russia. They are ...

I have told many groups over the last year to be worried about stability in Russia. The economy has certainly been doing well, and many firms are making money; yet the societal underpinnings made me nervous.

First, the strengths of Russia. They are the top oil-producing nation in the world, and the cash is flowing in at an impressive pace. Manufacturing, mining, and food production are all ticking along at double-digit levels. Inflationary pressures are coming down (currently 3.6%). Unemployment has fallen to 5.8%, and the Trade Balance has risen to $210.5 billion with more rise likely. It sounds great.

Yet, the bond market seems to disagree. The 10-year yield on government bonds had been cruising at 4.73% until March. Now it has jumped to 8.85%. The logical reason is the re-election of Vladimir Putin. He makes people nervous, including me.

There were tens of thousands of people protesting in Moscow on June 13. They were seeking the resignation of Mr. Putin. The move by these citizens is a brave one given the Kremlin is escalating crackdown on dissidents. Fortunately, the riot people and the folks in the street kept their cool, and the demonstration was peaceful. The fact that so many people braved (again) the wrath of the Kremlin shows the depth of the problem.

Mr. Putin is a destabilizing force and is not good for the growth of a free market economy. Foreign direct investment in Russia can yield great returns for you, but make sure you understand the risks of social instability, difficulty in getting profits out of Russia, potential nationalization, and the lack of a fair and consistent government oversight and protection.

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