The Worldview Guide to Investing in Russia


Investing in High-Tech in Russia, Part I: From Italy with Love...for Russia

In June 2011, I attended the 18th annual conference of the Multinational Finance Society. My hotel, located in a prosperous section of Rome, did not have hot water running, and the air conditioning didn’t work—conditions that seemed incongruous with the surroundings. But I was pleased to discover that the TV had 20 international channels, including five Russian ones, two Chinese, and several Arabic. I found the most interesting channel to be Bloomberg Europe, where I caught a conversation about investment in Russia.

Discussions about investment in Russia usually center on oil and gas, but the leader of the Bloomberg panel shifted the subject to high tech. While “Russian high tech” seems like an oxymoron thanks to our mainstream media, the perceptions of Russian high tech, and of Russian markets in general, are very different from reality.

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Russia: Some BRICs Are Different

Russia has always been different from the rest of the world. Even 20 years after the end of the Soviet Union and the Cold War, this author still finds it a little strange to find Russia grouped with other BRICs, or most emerging market countries. The others—China, India, and Brazil—all have very large portions of their populations struggling with poverty, and are characterized by historically limited, but now improving, access to technology. Not Russia.

Other BRICs still have relatively low-quality human capital economically speaking, although it should be added that their elite performers, even if a tiny percentage of the population, are now as world class as anywhere. In most emerging markets, much of the recent economic productivity and output gains have come through the application of financial and technological capital to a low-wage workforce, combined with more open international trade rules permitting profit generation from exports. Russia is different.

Russia is essentially a collapsed empire, struggling with its past, trying to rise from its ashes, and—it should be added—with means to do so. Unlike other BRICs, and similar to emerging economies in Eastern Europe, Russia’s human capital is extremely flexible and capable, particularly in mathematics, computation, and the sciences—a legacy of Soviet education and habits that may have atrophied somewhat, but is still substantial. Russia also has a modern history of technological development and scientific innovation (Chinese and Indian achievements pre-1800 notwithstanding), although it is only in recent years that those advances have been at all directed at or benefited the ordinary consumer. Poverty in Russia is real, particularly east of the Ural Mountains, but it is not nearly as severe and pervasive as poverty in the other BRICs.

Russia is an emerging market not for its historical poverty or access to technology, but because it has made a transition from a centrally planned to a market-based economy. It is primarily the recent adoption of markets, the rules that govern them, and the population’s experience in operating with them—the institutional software, as Tom Friedman describes it—that marks Russia as an emerging market. The recent availability of foreign financial capital has made technological improvements easier to deploy, and Russia’s comfort with foreign investment is an issue in some circumstances.

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