Investing in Russia

With yet another hopeless Mikhail Khodorovsky hearing scheduled for December 15th, the unsustainability of the Russian government system is increasingly evident.  Few, if any, people who know anything about Russia would deny that its leadership is corrupt, and that bribery and favoritism have long been institutionalized there.  As usual, people who challenge corruption, refuse to comply with the demands of those in power, or otherwise get in the way, become its victims.  Khodorovsky's story is a prominent example.  The lack of a competitive economy means the system can't support itself in its current state for long.

Investment in developing countries (emerging markets) such as Russia is a popular trend, with promises to get into the market early and be the first to make money off the growing economy.  But nobody really knows when the market will actually emerge, and whether you will be on the brink of success or of losing everything.  Investing in Russia is both difficult and increasingly risky for U.S. companies, but hasn't deterred them from trying.

The main problem: Developing business in Russia without having government connections and/or giving bribes is hard.

Wal-Mart recently tried to get into the Russian market and acquire Kopeyka, a discount retail chain in Russia.  Because Wal-Mart was unable to agree on a deal with Kopeyka, however, a Russian retail chain X5 Retail Group--which is owned by a Russian millionaire--will be acquiring the discount chain to maintain and solidify its number one position as the top retail chain in Russia by volume.  Most likely Wal-Mart, like many other U.S. companies, is having a hard time agreeing on a deal, while Russian companies have no problem doing so, because the U.S. prohibits its entities from giving bribes under the Foreign Corrupt Practices Act.

Meanwhile, Pepsi Co. announced its decision to buy two thirds of the Russian juice manufacturer Wimm-Bill-Dann to get an even larger stake in the Russian juice market.  This investment seems likely to succeed because Pepsi Co. already has a large stake in the Russian beverage market, has lots of assets and leverage, and most importantly apparently involved former President and current Prime Minister Vladimir Putin in the final sign-off of the deal.  Will be interesting to watch the situation unfold.