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Friday, April 2, 2010
CAUCASIAN TERROR - HOW WILL RUSSIAN LEADERS REACT? IMPACTS FOR INTERNATIONAL BUSINESS
The Economist was one of the first internationally acclaimed news sources to come up with a good, reflective piece on the terrorist attack on Moscow's metro on Monday, March 29th. A few elements in this piece caught LMG's eye and are -... as we believe - important when trying to understand the Russian situation.
1) DISCIPLINED ?
It seemed as if the attacks on stations Lyubyanka (close to the FSB headquarters) and Kultury Park (close to the inner ring around Moscow's central district) did not lead to any panic whatsoever.
The Russian population, already internationally 'renowned' for its numbness to almost anything ('take an extra wodka and go on with your regular business'), showed once again that this was almost part of regular business now. Where its leaders were talking about destruction of the terrorists, the population knew better.
2) THE NORTH CAUCASIAN JIG-SAW PUZZLE
The North Caucasian region is more than just Chechnya. Actually, whereas things in Chechnya under Kadirov seem to go reasonable well - from a Russian perspective - with not much violence during the last few years, turbulence has spread to Dagestan, Ossetia and Ingussetia. And that is not making things easier. If you want to build a 'model' of Moscow's popularity in its far-off regions it is clear that 'the further away from Moscow, the less popular governments are'. Why?
Russian police, FSB (the former KGB) and government bureaucrats are not very popular in general and this holds even more so when moving further away from Moscow. Putin and Medvedev are trying to crack down on corruption, but things aren't exactly easy in the world's largest country (geographically) with only a relatively small population. And the fact that a lot of people are after generations of disrespect and harsh governments numb for efforts to change things for the better is not helping either. And neither is the fact that we are talking about a country with vast commodity resources in outback provinces. Temptations are too large for corrupt government officials and opposition forces alike.
Is it about terrorism or corruption in Russia?
4) WHAT TO DO?
It is therefore a sheer impossibility to improve things substantially over the next 3-5 years. Part of the Russian risk analysis should be the incorporation of 'political and governance' risk, especially when dealing with either government officials or firms in areas far away from Moscow. Unfortunately the Medvedev-Putin camp made things only slightly better compared to what was laid down by its predecessors. Don't be too optimistic and ensure good legal support AND even more important safety valves in deals and agreements that can limit your downside risk.
EXPECT THE WORST AND CELEBRATE POSITIVE SURPRISES is the only feasible strategy in Russia, even more so when you have to incorporate political factors related to outback provinces and corruption. Only when this downside risk analysis leads to a more or less break-even situation should you consider large investments in Russia. It is and will remain a country with tremendous opportunities - not only commodity-related - but one with huge pitfalls as well. By far the most complicated and risky of the four BRIC nations. Be aware of that! International firms wanting to do business in or with Russia should therefore make sure they have their numbers and risks right on a case-by-case basis. We wouldn't even dare to start analyzing those cases without the support of best-of-breed local partners. Be sure you follow that strategy too!
Principal at LMG Emerge. LMG is an internationally operating independent financial consultancy firm headquartered in Zeist, The Netherlands.
Our clientele consists of institutional and high net-worth private investors (investment advice) and corporates (valuation advice, risk analyses).
Our areas of activity include: Asset Allocation, Selection of Financial Providers/Asset Managers and Emerging Markets advice.