Investment in Russia Essay Example For Students

Investment in Russia Essay In 1991 Boris Yeltsin became the first elected leader of Russia. This was the end of Michael Gorbachevs policy of perestroika ( radical changes in the economy) and glasnost ( the possibility of free expression) ( Gunn, 1995). The new elected president wanted some more radical changes; decentralisation, democracy and a market economy. For Russia, transition to a market economy has been difficult because the government has been trying simultaneously to change the economic and the political system of the country. This resulted in a lot problems, but the Russian market is emerging. This brings me to the following problem statement; Is it Interesting for a multinational enterprise to invest in Russia?I shall answer this question by first evaluating the situation in Russia, second I shall discuss the opportunities and problems of the Russian business environment, and finally I shall draw my conclusion. In order to achieve a correct and effective transition, the Russian government tried to achieve three main principles:? liberalisation of prices and trade. In January 1992 Russia started the process of liberalising prices and trade. A major point in this liberalisation was establishing clear and easily enforceable property rights. Until this is done, entrepreneurs will have little faith in the market and capital will flo w out of Russia. Especially in the first few years of the transition inflation was enormousInflation in Russia5.090.41534.0877.0552.0( European economy, Special supplement, Eastern Europe, 1992 and 1994)The government does not set five year plans anymore in which is stated what , where , and how much to produce ( Like in the communist period). The producers now have to decide themselves what ,where, and how much to produce. These decisions need a lot of licenses which the local governments have to supply. In order to adapt to these changes local governments need some radical changes, but at the moment bribery is usually the only effective way to get such a licence. ? Privatisation of state owned companies. In Russia privatising the state-owned enterprises is very difficult, because the enterprises are often monopolies which often produce all the parts they need in only one facility. This makes breaking these enterprises up very complicated, and often they had to be closed because of inefficiency and uncompetitiveness. In the first years of the transition output fell considerably (Daniels/Radebaugh,1995). ? Achieving macro- economic stability. The most concerning macro-economic problem in Russia is the inflation. A high inflation frightens investors. The most important cause of the inflation is the government deficit. The government should try to increase government earnings, for example higher taxes, or loaning money from the central bank at market rates(Welford/Presscot, 3rd edition). The Russians put a lot effort in the transitions of their country, but it seems that the environment is being neglected. At the moment pollution is the largest environmental problem. Air pollution is enormous because of the emission of coal-fired electric plants, and the pollution of large industry. Soil contamination and erosion are often a effect of improper use of agricultural chemicals. Even areas of sometimes intense nuclear contamination can be found in Russia. (htpp://muhu.cs.helsinki. etc.)It can be an advantage for a company that a country ( like Russia ) hardly pays any attention to the environment. For example, a firm can use old, more polluting but cheaper techniques, and has to pay less pollution taxes. A disadvantage for such practises is of course the bad publicity. A company can even face boycott in these cases ( for example, Shell Nigeria).Foreign investment in Russia has increased considerably the last few years. During the first quarter of 1996 foreign investment i n the chemical and petrochemical branches was 40 times the amount invested in the first quarter in 1995, non-ferrous metallurgy went up 20 times, and fuel and energy branch went up 10 times( http//www.odci.gov/cia etc.). Although such increases can not be shown for every branch, it does show foreign interest in the Russian market. In the following part I shall discuss some opportunities of the Russian market.? Large market. Almost 150 million people live in Russia. Now that the economy has changed into a market economy, all the consumers can decide themselves( in the former USSR the state decided this) what products they want to purchase decide. This makes certain markets grow very fast. The telephone business for example; In 1991 and 1992 the number of telephone applications reached 11,000,000. Only 661,000 new telephones were installed( http://www.odci.gov/cia etc.). Because of this enormous booming market, the American firm ATT agreed upon a joint venture with the Russian telecom munication company DALS (ATT news release, emailprotected). James Joyce's The Dead James Joyce's James Joyce's EssayIn Russia it is very difficult to find market oriented personnel, because people where used to listen to a five year plan instead of the market. For the Moscow restaurant McDonalds had send a few managers to the hamburger university in Chicago, and several other personnel was send on training in restaurants throughout Europe and the USA (Daniels/Radebaugh,1995). ? Lack of suitable partners. When a company wants to enter Russia though a strategic alliance, they need to find a suitable partner. In Russia it is very hard to find such a business partner, because all Russian companies are relative young. The companies have hardly any experience in making decisions concerning prices, marketing, materials, etc. This makes them rather unreliable or useless as a business partner. ? Corruption and crime. In the former USSR it was almost a custom to bribe someone if you wanted for example a license. Although the enormous bureaucratic lines of government officials seem to have diminished, it is still very hard to make a deal without bribery. The criminality has also boomed since the transition, businessman are often forced to pay money to criminals for protection, this is of course plain extortion ( Economist, Nov. 96)In all the examples mentioned before, the companies entered the Russian market by making a joint venture agreement with a local company. An international joint venture is a company that is owned by two or more firms of different nationality( Beamish, et al, 1997). Firms often want to use a joint venture to strengthen or protect their own business. A firm can for example achieve economies of scale, or share the cost of research and development in. The knowledge of culture and market, and the sharing of financial risks are also reasons for joint vent ures (Beamish, et al, 1997). With the transition to a market economy and the liberalisation of trade an enormous market has opened for foreign investors. Russia is very attractive for foreign investors because Russia has an enormous market ( almost 150 million people ), plenty natural resources and high quality technology. Problems like the political instability, the lack of infrastructure, the difficulties in obtaining supply and raw materials, the lack of suitable partners and the corruption are very difficult for a firm. There still is a lot to be done before these problems are solved. Because things change very rapidly at the moment , it seems very risky and uncertain to invest in Russia. A joint venture seems a suitable entry mode if a firm decides to invest in Russia. With a joint venture a firm can spread risks and lower costs. The Russian market is emerging, and with the Russians putting as much effort in as they have done until now, at least in the future Russia shall becom e a country worth investing in. Even though Russia still has a long way to go before it reaches the economic and political level of the most modern western societies, Russia might be very profitable and worthwhile investing in.Bibliography: