Russian Capitalism -- A Short History and Even Shorter Memories

Russia is among the hot emerging markets these days for companies exploring both export opportunities as well as international expansion of foreign operations.  There is no question but what the economy has stabilized since Vladimir Putin took the reigns of power and GDP has been growing at an enviable pace.  But while there are certainly viable business opportunities to be had in Russia, some companies that I've spoken with and read about seem to have forgotten that Russia is still a risky place to do business with a limited track record of success.

In our fast paced world where last year seems irrelevant to today's hot trends, it is easy to lose perspective on the fact that The Wall which segregated the former Soviet Union from much of the emerging global market economy came down a scant 18 years ago.  That historic event was followed by a decade of chaos during which the emphasis was on democracy for democracy's sake, leaving the economy largely in the hands of organized crime bosses. 

Putin, who came to power 7 years ago, has brought order to the chaos, but it seems to be coming at a price.  Indeed, while the economy as a whole has been growing, the European Bank for Reconstruction and Development reports that the share of the economy attributable to the private sector has actually declined.  AM Best gives Russia a "Tier III" risk rating.  With GDP (PPP) of $1.5 trillion, Russia's economy is 1/10th that of the U.S. or EU, less than 1/5th the size of China, and only about 40% the size of India's.  Given an economy propped up by world demand for its rich oil reserves, an increasing emphasis on government control of infrastructure industries and the media, and the recent saber rattling at the West, Russia in many ways resembles Hugo Chavez's Venezuela more than a hot emerging market.

Having gone from the state controlled economy under the autocratic rule of the Tsars directly to the planned economy of a socialist state without ever passing Go, Russia has one of the shortest histories with a free market economy of any country in the world.  If Russia were a stock, it would be on my watch list, but I'd be hard pressed to rate it a "buy" for any but the least risk averse investors.