Editorial: risks realised, in Russian economy

Photo: Alexander Zemlianichenko / AP

In economic activities, any entrepreneur and investor needs to consider certain risks. These may be market risks, political risks, geographical risks or even force majeure. In some countries, these risks are lower, and higher in others. 

While there has been such a thing as Russian stock market, its prices have always stayed cheaper by third than at other such emerging economies as Brazil, for instance. Often, the (deceptive) cheapness has served as motivation to invest in Russia. But the markets are (almost) always right. The cheapness of Russian stock market has had its reason – namely, its risks. Always, Russia has been a corrupt and authoritarian state, very risky to invest in. Of the riskiness of the market, the world got a bite 16 years ago when Russia chose not to redeem its bonds and to devalue the rouble. 

During the years in between, we all internationally got lulled out of our watchfulness. As the century turned and Vladimir Putin rose to power, by several factors interacting, oil prices begun to rise and the rise was a long long one. Along with the long long rise, part of the people gradually begun to accumulate wealth as well. For many, Russia become an ever more attractive region to invest in, as it felt like a Russian middle class was emerging. The rouble crisis of 1998 begun to be forgotten. Few, also, were those that paid attention to how, meanwhile, the only oil company with Western working culture – Yukos – was demolished and its assets raided into state owned Rosneft.

The economy proved unable to make use of the hundreds of billions of dollars earned by the high oil price. Russia’s economy remained standing on one leg only – the oil/gas industry. Instead of diversifying the economy, all they did was focus on centralising it into state hands – and on military aggressiveness.

While during his first period in office Vladimir Putin had the luck of ascribing to his name the economic growth mainly due to the breathtaking rise of oil prices, after the four-year intermezzo things went into reverse. During the new term, things started to go from bad to worse – for the time being, oil price flattened out; some months ago, it went into rapid decline. This, for Russia, was a painful blow, to which are added the Western sanctions triggered by aggression against Ukraine.

The risks in Russian economy have realised again – something every investor ought to have considered.

For Estonian, European and global economy, the collapse of the Rouble and the recession in Russia – which has likely begun – should not take an overly heavy effect. First and foremost, such areas and enterprises will suffer as are the closest linked to Russia.

By now, probably, entrepreneurs and investors are more careful regarding Russia; but, should things ever start to gradually improve over there, don’t you forget the risks. Never ever forget the risks.