Sochi Games Are Stark Reminder Why Investors Hesitate in Russia

According to the World Economic Forum’s (WEF) most recent Global Competitiveness Report, Russia ranks 64th out of 144 countries on the Global Competitive Index, far below other countries in the G8 and even several G20 nations.

The WEF is among those that cite corruption as the continued biggest challenge for Russia and one that has a negative effect on the workings of the government and the country’s institutions—so much so that it’s become something of a joke that the best Russian companies to invest in are probably those whose management teams are closely aligned with premier Vladimir Putin.

Another obstacle Hanson sees to investing in Russia is the high level of state intervention that exists in the private sector there.

“There are some good, entrepreneurial companies in Russia but they’re not allowed to flourish there the way they are in some other emerging markets,” Hanson said. On a more positive note, though, the most recent round of global currency turbulence that has also affected the Russian ruble might work well against the corruption and governance problems, Hanson believes.

“Russia doesn’t have a current account deficit like some of these other countries, but it’s become clear that no emerging market can count on that fast and easy money anymore, so long-term, rising interest rates are probably a good thing for a country with low corporate governance, because you can’t always live with cheap money and you have to clean things up when it’s harder to get investment in,” he said.

On the fiscal side, Russia has been fairly prudent and over the past 10 years, has made an effort to properly save its revenues from the oil windfall.

However, Russia’s other big problem is its over reliance on energy exports, oil in particularly, Milev said, and this is going to become even more problematic now, “when oil prices seem to be hanging around their average and it seems we’re entering an environment where we’re unlikely to see dramatic oil price increases.” Without the boost from energy exports it’s grown to rely on, the Russian economy will have a very tough time growing.

“Other emerging markets have also had growth issues and there are concerns everywhere, so Russia isn’t alone in this situation, but Russia’s problems seem a lot bigger than other emerging markets’,” Milev said. “They’ve got to figure out ways to grow the Russian economy and that is the biggest challenge.”

Although some attempts have been made to make the Russian economy more diverse, it remains to be seen whether those attempts are going to be enough to put Russia into a higher growth category.