Wednesday, June 18, 2014

The Risks of Investing in Putin's Russia

Today an action was held outside the Ritz Carlton where senior officials for the Government of the City of Moscow were trying to convince Canadian companies to invest in Putin's Russia (you can see more about the protest here: No Business with Moscow! No Support for Terrorism. You can also see some pictures of the demonstration on our FB page in the album titled "Say No to Putin".

The point of the action was to educate Canadian business people on why doing business with Putin's Russia is not a good idea. Below is the text of the informational flyer they were distributing:


Today, senior officials of the Government of the City of Moscow are trying to convince you to invest in various business projects in the capital of Russia. While there may be some attractive opportunities, any investor should weigh the risks related to such ventures. Here are our seven questions to you:

1) Russia is a country with rampant corruption. It ranked 127 among 175 countries by Transparency International Corruption Perception Index in 2013, behind such countries as Belarus, Niger and Sierra Leone. Is there a risk of violating your country’s anti-corruption laws?

2) Working on a possible investment in Russia, remember that you will have to play with an open deck of cards. Your counterparts or your local competitors will be able to pay for most sophisticated surveillance and wire-tapping. The information asymmetry between the buyer and the seller is often extreme in Russia. Do you know how to play this game?

3) As a minority investor, you have no chance of controlling anything in Russia. In late 2013, Rosneft bought out the remaining minority shareholders of BP-TNK at 44% discount to the price that Rosneft paid to oligarch holders of large share blocks. Do you know what your investment is really worth, when it comes to liquidation?

4) Justice in Russia is very different from what you are used to. In 2009, Sergei Magnitsky, an accountant and a lawyer who served foreign investors, was jailed without a trial for almost a year and died in prison because he was denied medical care he needed. It’s impossible to do due diligence without visiting the country regularly and having agents there on a permanent basis. Are you willing to risk your life or the lives of your agents?

5) Russia is a country with selective prosecution. Mikhail Khodorkovsky was arrested in 2003 and jailed for 9 years on charges that some of Putin’s friends could be just as easily charged with. After years in prison, another set of charges was brought to jail him again. Do you have what it takes to be on the right side of Mr. Putin’s book of naughty and nice?

6) Russia is a country with large foreign trade surplus as well as one of the world’s largest sovereign wealth funds built on oil and gas exports. In April 2014, Russian increased its holdings of US Treasuries by 15.9% over March 2014, to $116.4bn. Does the Russian Government know of some risks that you don’t know about?

7) Russia is going through a period of acute imperial fever, waging a low-intensity war in Eastern Ukraine. It was subject to 2 rounds of international sanctions, but there is no sign that Mr. Putin will relent. There is a significant risk that sanctions will affect whole sectors of the economy and perhaps lead to retaliatory sanctions by Russia. Are you sure you will be able to repatriate your capital if that happens?


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