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March 06, 2014

Ukraine Strife Complicates Investment Climate in Russia

by Jim Randle

Russia’s recent actions in Ukraine shook investors and initially sent stock prices down and gold prices up.  Investors are also worried about U.S. sanctions and Russian threats to seize foreign assets. 

One expert says any impact on the investment climate may be temporary.  Foreign investors returned to Russia just a few years after the nation defaulted on debt and fought with neighboring Georgia.  One major investor who fled Moscow complains that Russia is already a brutal place to do business.

Russia’s 2008 war with Georgia drew criticism from Western nations and troubled investors.

It was fought over two breakaway regions of Georgia.

War worries investors because it creates uncertainty and greater risk.

Russia’s 1998 default worried investors even more.  Some vowed never to return to the nation that failed to repay billions of dollars in loans.  

But an expert on Ukraine and Russia at the investment advisory firm “Motley Fool,” Rich Smith, says investors eventually go wherever there is money to be made.

“U.S. oil companies were still investing in Russia, U.S. consumer goods companies were still selling things into Russia," he said. "People have short memories, big things happen in Russia and they look very big in the short term, but then things get back to normal."

The founder of Hermitage Capital Management, William Browder, once had huge investments in Russia. He now says Russia’s investment climate is terrible.  

“The rule of law doesn’t exist there, your property rights, completely non-existent," he said. "You could easily lose a lot of money before any of this stuff [the conflict with Ukraine] started happening."

Browder says his attorney Sergei Magnitsky, was beaten in prison and died there.  Magnitsky had accused Russian police of corruption.

According to Browder, corrupt officials retaliated by accusing Magnitsky and Browder of millions of dollars in tax fraud.   

The case prompted Moscow to end U.S. adoptions of Russian orphans in retaliation for Washington imposing financial sanctions on Russian officials.

Browder, now in London, says corruption is widespread in Russia.  He still faces a lawsuit and death threats from Moscow.

“Will the government create such a hostile environment for business, for geopolitics, for people that is it impossible to go there and do business," he said. "And the way it’s going right now, that could easily happen."

In the meantime, tensions over Ukraine are making the investment climate in Russia more complex and difficult.  

Washington is imposing new visa restrictions and financial sanctions on Russians and others it says threaten Ukraine.

The European Union has frozen the assets of some former Ukrainian officials, while at the same time offering the country billions of dollars in aid.