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Case Study; Russian Market

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Case Study; Russian Market

I. Why is an investment in Russia considered politically risky?

Foreigners have never had an easy period understanding Russian markets. Investors in

the current world would agree with Winston Churchill argument that Russia was a "riddle,

wrapped in a mystery, inside an enigma." Even decades after the stunning fall of Soviet

communist authority in 1991, it's still tough for many investors to fail to recall that time.

Following was a short moment of euphoria, which an authoritarian administration and a

crony capitalist culture quickly replaced (Click &Weiner, 2010 p.785). While regular

investors might not be able to make direct investments in the Russian stock market, there are

other ways to gain exposure to the nation's financial markets, including mutual funds,

American depositary receipts (ADRs), and exchange-traded funds (ETFs), which are

certificates from U.S. banks and represent a specific amount of shares in foreign corporations.

It is entirely up to an investor to make active investments in Russia, even though it isn't

always simple.

Due to Russia's political and economic instability, investing there is considered

politically dangerous. The autocratic government of Russia and its propensity to meddle in

the business activities of private firms are major contributors to political risk in that nation.

Expropriating foreign capital, passing legislation that is adverse to foreign investors, and

manipulating currency and exchange rates are all long-standing practices of the Russian

government. The absence of openness, the disregard for the rule of law, and the disregard for

investor rights are other characteristics of Russia's political environment. Significant

international sanctions, including those imposed by the United States, the European Union,

and other nations, are also in place against Russia. The Russian economy has suffered

enormous losses due to these sanctions, and international investors now find it difficult to
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enter the Russian market. The possibility that investments in Russia might be corrupted exists

in addition to the political risk. Russia has always struggled with corruption, and this problem

continues to be widely perceived (Liuhto, 2010 p. 144). Foreign investors may find it

challenging to do business in Russia due to a lack of confidence in the Russian government.

The possibility of geopolitical upheaval in the area is the last danger. Due to Russia's

participation in the wars in Syria and Ukraine and its tense relationship with the West, there is

a chance that investments might be in danger.

2. Despite the political risk, why do foreign multinationals such as Carlsberg eager to

invest in Russia?

Opportunities to invest in Russian market are many and wide-ranging for international

businesses. Any foreign individual or organization is allowed to start a business in Russia.

One of the biggest benefits of the Russian special economic zones is that international

investors who choose to establish businesses there will see a 30% start-up cost reduction

compared to other regions of the nation. Additionally, Russian SEZ inhabitants will benefit

from lower income tax rates from 0 to 13.5% instead of the standard rate of 20%. Investments

in Russia that purchase real estate in one of the 28 special zones will get a 10 to 15-year tax

break (Gurkov, 2014 p.220). Five to ten years of exemptions from the federal land tax will be

available to foreign investors. Another significant benefit for businesses that do not have to

pay VAT and customs charges on imported items is the unique customs regime. By

submitting all of their documentation via the Russian "single window" system, investors have

another opportunity to cut down on time needed for the first phases of their projects. A

streamlined immigration process will benefit specialized foreign labor if it relocates to one of

Russia's special economic zones.

In 1999, Russia permitted a foreign investment legislation that offers international

businesses who wish to invest in Russia the similar advantages as Russian businesses. The

environment for foreign investment has improved over the last several years, particularly as

Russia makes significant strides toward joining the World Trade Organization (WTO). Russia

is also endeavouring to join the Organization for Economic Cooperation and Development

(OECD) to get wider access to global markets and entice more foreign investors. Tax

reductions and economic sector changes promote foreign investment in Russia. Additionally,

Russia has a highly competent and educated workforce, attracting global investment. The

Russian government inspires foreign businesses to participate in the energy, food, and

distribution sectors and the gas and oil industry. Given its access to the Pacific and Arctic

Oceans, the Pacific and Black Seas, the Sea of Japan, and the Barents Sea, Russia is

undoubtedly the nation to draw FDI in the marine industry. The Sovetskaya Gavan free zone,

a port city on the Far Eastern Coast with access to the Sea of Japan, might interest those

seeking various advantages. The primary sector in this special economic zone is shipping, and

facilities for ship maintenance, seafood processing, and logistics are available for individuals

looking to establish businesses there.

3. If you were a Carlsberg board member, would you vote 'yes" or 'no" for a new

project to acquire a local brewery in Russia?

If I were a member of the Carlsberg board, I would support a new initiative to buy a

regional brewery in Russia. Carlsberg has a lengthy track record of success in the alcoholic

beverage industry and has the potential to grow much more in the Russian market. Carlsberg

may tap into the rising demand for alcoholic drinks in the area and take advantage of the

Russian market by purchasing a local brewery there.

With a growth rate of 10.5% in 2019, the Russian beer industry has one of the

strongest growth rates worldwide. It allows Carlsberg to increase its regional footprint and

take advantage of the rising beer demand (Kluge, 2017 p. 127). In addition, Russia is the

fourth-biggest producer of beer in the world and the largest in Europe, giving Carlsberg

access to a sizable market. Carlsberg would have a rare chance to learn about the local market

and the tastes of Russian customers via the purchase of a nearby brewery. It would allow the

business to create more specialized goods and marketing plans that appeal to the local

populace. Additionally, buying a nearby brewery would allow Carlsberg to improve its

connections with regional vendors, distributors, and merchants. By doing this, the business

would be able to improve its supply chain and have more control over the distribution and

price of its goods.

References;

Click, R.W. and Weiner, R.J., 2010. Resource nationalism meets the market: Political risk and the

value of petroleum reserves. Journal of International Business Studies, 41, pp.783-803.

Gurkov, I., 2014. Management practices in Russian manufacturing subsidiaries of foreign

multinational corporations: challenging some beliefs about contemporary Russian industrial

management. Post-Communist Economies, 26(2), pp.220-240.

Kluge, J.N., 2017. Foreign direct investment, political risk and the limited access order. New Political

Economy, 22(1), pp.109-127.

Liuhto, K., 2010. Political risk for foreign firms in Russia. Romanian Journal of Economic

Forecasting, 3, pp.141-157.