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Investment In Russia Essay, Research Paper

Russia

In 1991 Boris Yeltsin became the first elected leader of Russia. This was the end of Michael Gorbachev?s policy of perestroika ( radical changes in the economy) and glasnost ( the possibility of free expression) ( Gunn, 1995). The new elected president wanted some more radical changes; decentralisation, democracy and a market economy.

For Russia, transition to a market economy has been difficult because the government has been trying simultaneously to change the economic and the political system of the country. This resulted in a lot problems, but the Russian market is emerging. This brings me to the following problem statement; Is it Interesting for a multinational enterprise to invest in Russia?

I shall answer this question by first evaluating the situation in Russia, second I shall discuss the opportunities and problems of the Russian business environment, and finally I shall draw my conclusion.

The situation in Russia

The transition to a market economy

In order to achieve a correct and effective transition, the Russian government tried to achieve three main principles:

· liberalisation of prices and trade. In January 1992 Russia started the process of liberalising prices and trade. A major point in this liberalisation was establishing clear and easily enforceable property rights. Until this is done, entrepreneurs will have little faith in the market and capital will flow out of Russia. Especially in the first few years of the transition inflation was enormous

1990 1991 1992 1993 1994

Inflation in Russia 5.0 90.4 1534.0 877.0 552.0

( European economy, Special supplement, Eastern Europe, 1992 and 1994)

The government does not set five year plans anymore in which is stated what , where , and how much to produce ( Like in the communist period). The producers now have to decide themselves what ,where, and how much to produce. These decisions need a lot of licenses which the local governments have to supply. In order to adapt to these changes local governments need some radical changes, but at the moment bribery is usually the only effective way to get such a licence.

· Privatisation of state owned companies. In Russia privatising the state-owned enterprises is very difficult, because the enterprises are often monopolies which often produce all the parts they need in only one facility. This makes breaking these enterprises up very complicated, and often they had to be closed because of inefficiency and uncompetitiveness. In the first years of the transition output fell considerably (Daniels/Radebaugh,1995).

· Achieving macro- economic stability. The most concerning macro-economic problem in Russia is the inflation. A high inflation frightens investors. The most important cause of the inflation is the government deficit. The government should try to increase government earnings, for example higher taxes, or loaning money from the central bank at market rates(Welford/Presscot, 3rd edition).

The Russians put a lot effort in the transitions of their country, but it seems that the environment is being neglected.

Pollution in Russia

At the moment pollution is the largest environmental problem. Air pollution is enormous because of the emission of coal-fired electric plants, and the pollution of large industry. Soil contamination and erosion are often a effect of improper use of agricultural chemicals. Even areas of sometimes intense nuclear contamination can be found in Russia. (htpp://muhu.cs.helsinki. etc.)

It can be an advantage for a company that a country ( like Russia ) hardly pays any attention to the environment. For example, a firm can use old, more polluting but cheaper techniques, and has to pay less pollution taxes. A disadvantage for such practises is of course the bad publicity. A company can even face boycott in these cases ( for example, Shell Nigeria).

The Russian business environment

Foreign investment in Russia has increased considerably the last few years. During the first quarter of 1996 foreign investment in the chemical and petrochemical branches was 40 times the amount invested in the first quarter in 1995, non-ferrous metallurgy went up 20 times, and fuel and energy branch went up 10 times ( http//www.odci.gov/cia etc.). Although such increases can not be shown for every branch, it does show foreign interest in the Russian market. In the following part I shall discuss some opportunities of the Russian market.

· Large market. Almost 150 million people live in Russia. Now that the economy has changed into a market economy, all the consumers can decide themselves ( in the former USSR the state decided this) what products they want to purchase decide. This makes certain markets grow very fast. The telephone business for example; In 1991 and 1992 the number of telephone applications reached 11,000,000. Only 661,000 new telephones were installed( http://www.odci.gov/cia etc.). Because of this enormous booming market, the American firm AT&T agreed upon a joint venture with the Russian telecommunication company DALS (AT&T news release, [email protected]).

· natural resources. Russia is an enormous country with a lot of natural resources ( coal, gas, oil, etc.) These industries used to be in governmental hands, but the last few years most of these often inefficient companies have been privatised.

The canadian firm Black Sea Energy announced a joint venture with the Russian firm Tyumennedra. The joint venture is going to explore oil wells near the black sea which are expected to produce 1.4 billion barrels of oil (w.w.w.,Black Sea Energy).

· Technology. In the history of the USSR there have always been large investments in war and space technology. This has resulted in a group of well educated technicians and scientists. In 1995 the American company Lockheed Martin and the Russian company Khunichev, both developers of space launch systems, combined their technology in the International Launch Service (ILS). Together they developed the Atlas, a new space launcher ([email protected]).

· Investing in an early stage. Investing in a rather undeveloped economy in a early stage of transition can give a company a first-in advantage ( any benefit gained in terms of brand recognition and lining up best suppliers, distributors, and local partners before competitors do)(Daniels/Radebaugh, 1995) AT&T ,for example, was first to enter the Russian telecommunication market. They where able to form a joint venture with DALS, which was the marketleader at that time. This gave AT&T a huge advantage (AT&T news release, [email protected])

A transition of both the political and the economic system of course brings a lot of problems. In the following part I shall discuss some of the major problems of Russia.

Problems in the Russian business environment

In Russia the primary sector is relatively large compared with the average of the EU countries, as can be seen in the table below. This is because of the relatively underdeveloped economy.

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