The Russian Federation emerged following the dissolution of the Soviet Union in 1991 and adopted a new constitution following violent confrontations in 1993. Russia’s increasingly centralized government has tightened controls on civil society. Dmitry Medvedev was elected president in March 2008, but former President Vladimir Putin remains prime minister and leader of the ruling United Russia party. Medvedev’s efforts to improve the rule of law have stalled.
Russia’s increased risk profile of Maplecroft reflects both the heightened activity of militant Islamist separatists in the Northern Caucasus and their ambition to strike targets else where in the country. Russia has suffered a number of devastating terrorist attacks during 2010, including the March 2010 Moscow Metro bombing, which killed 40 people. Such attacks have raised Russia’s risk profile in the Terrorism Risk Index and Conflict and Political Violence Index. The country’s poor performance is compounded by its ‘high risk’ ratings for its business environment, corporate governance and the endemic nature of corruption, which is prevalent throughout all tiers of government.
The state has reasserted its role in the extractive industries and depends heavily on exports of natural resources, especially hydrocarbons. The global financial crisis, over regulation, pervasive corruption, and the war with Georgia sparked capital flight in 2008, and GDP contracted in 2009. Moscow has an agreement with Ukraine to extend basing of the Black Sea Fleet in Crimea for an additional 25 years from 2017.
Russians in general appreciate having more stability and this is helping to make the population feel that they have a 181 stake in the future. It is also generating confidence among Russian entrepreneurs as they do business with western partners and start to buy up companies in the West. However, Russia is still a country in transition and its institutions are weak, so the risks need to be considered.
Living standards for many are still poor, especially in the rural and more remote regions; but a backlash is unlikely because there is no political organisation through which this dissatisfaction can be expressed. Any significant fall in the oil price puts pressure on the budget, government spending and consumption in the cities, which could pose a political threat of upheaval. More active and organised opposition may develop as some powerful economic and political interests are affected by the reorganisation that has started to take place in the energy sector, utilities and the railways. A major failing of the political system, the lack of modernisation of Russia's institutional bodies and its civil service, could give rise to problems. Nevertheless, the political risk appears to be manageable and the political outlook stable for the next few years at least.
Challenges for companies operating in Russia also stem from an ineffective legal and regulatory system, which includes a lack of judicial independence from the government. Russia is rated ‘high risk’ in Maplecroft’s Rule of Law Index, and companies should monitor the increasing risk of poor contract enforcement and expropriation. Burdensome regulations continue to hinder private-sector development. The regulatory system suffers from corruption and a lack of transparency. Bureaucratic obstacles and inconsistent enforcement of regulations inject considerable uncertainty into entrepreneurial decision-making and are a particular problem for small businesses.
Irrespective of the said risks, Russia remains an attractive investment destination – particularly for the long term where the country scores well on resource security, infrastructure readiness and education. Russia has approximately 140m consumers and an expanding economy. IMF figures reveal that Russia’s real GDP growth amounted to 4% in 2010 and expects it to expand by 4.3% in 2011. The country also enjoys political stability. Russia has relatively low taxes. The individual income tax rate is a flat 13 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT) and a regional property tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.1 percent.
So long as risks are assessed, monitored and managed in the short term, Russia remains, as do all of the BRICs, an important growth economy and contributor to global economic recovery.