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Investing in Russia always a risky business

Stephen Harper is cautioning Canadian businesses that Russia is a risky place for them to do business right now, given Canada's escalating opposition to Russia's involvement in Ukraine. While the Prime Minister's warnings are undeniably wise counsel, Russia was already a minefield of investment risk even without a Ukrainian crisis to fret about.

Yes, the current threat became a little more concrete Monday, as Russia levied travel bans on 13 senior Canadian public officials – mostly MPs and Privy Council members, generally with ties to foreign policy and/or an active interest in Ukrainian issues – in retaliation for asset freezes and travel bans that Canada imposed on 14 members of Russian President Vladimir Putin's inner circle. While the list of Canadians hit by the action is essentially symbolic, striking at no one who actually has meaningful dealings with the Russians, it may signal Russia's intent to fight back if and when Canada and other Western nations impose more serious sanctions aimed closer to the vital organs of the Russian economy.

The World Bank ranks Russia 92nd on its list of the best countries in which to do business. (Canada ranks 19th.) It is notorious for poor regulation, flimsy property rights, shoddy investor protections, and rampant corruption among government officials. Transparency International's annual Corruption Perceptions Index ranks Russia is 127th out of 177 countries – by far the worst for any major world economy. China ranks 47 spots higher. (Canada is 9th.)

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In other words, despite the veneer of 21st-century European sophistication, this is no place like home.

Yet even if Russia was a more stable, well-governed market with effective regulations and strong legal institutions, this would still be a risky place to do business – simply because of the country's massive dependence on a single industry for its economic well-being. The energy sector accounts for more than 20 per cent of Russia's gross domestic product, and up to half of the government's budget revenue. That leaves both the public sector and the economy as a whole extremely vulnerable to gyrations in the price of commodities that have hardly proven themselves a pillar of stability in recent years.

Little wonder, then, that Russia's stock market has languished for years at price-to-earnings (P/E) multiples of around five times, less than one-third of the global norm, or that its stock-market volatility is considerably higher than average.

While Canadians have certainly increased their business and investment exposure to Russia as it has eased foreign barriers to entry in recent years, it has hardly grown to economically significant proportions. Russia accounted for just 0.4 per cent of Canada's exports and 0.7 per cent of Canadian foreign direct investment (FDI) in 2012. The hurdles remain too high, and the risks too onerous, for Russia to have become a prominent destination for Canadian business.

Still, it's worth noting that Canadian FDI in Russia has increased more than sixfold in recent years, and given the two countries' mutual interest in the natural resource sector, that relationship had the potential to change and grow. That was before Russia's heavy-handed move into Ukraine drove a wedge into it. Mr. Harper may put business interests at the top of his foreign-policy agenda, but even he has made it clear that the infringement on Ukraine's sovereignty takes precedence over those interests. Frankly, businesses are better off looking elsewhere – but that's really nothing new.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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