Forget the U.S., invest in . . . Russia? For Real?

Originally published by Politic365 here. Good news for investors turned off by the seemingly never-ending debt and financial crises in the U.S. and Europe:  With an increase in Foreign Direct […]

Originally published by Politic365 here.

Good news for investors turned off by the seemingly never-ending debt and financial crises in the U.S. and Europe:  With an increase in Foreign Direct Investment (FDI) of 20% over the last year, there are signals that Russia is now open for business.

Russia? Really?

Americans have grown accustomed to perceptions of Russia as one of the more restrictive, unstable, and – even – “evil” countries on the planet (thanks Rocky).  That they block sanctions against theocratic regimes and sequestered nation states ran by dictators that won’t go away does not help their cause.  And as far as investors have been concerned, Hollywood is not that far off.

If you were lucky enough to own a successful business in Russia in the 20th century, the Soviet government probably nationalized it for the “greater good” (which apparently meant total economic collapse and extreme poverty, but I digress).  Combined with an unstable economy, more Vodka drunks than a Georgetown corner and opportunities abroad draining the national talent pool, the country has been left with about as many bright stars as are visible during the dead of Russian winter.

According to the Heritage Foundation’s 2011 Index of Economic Freedom, Russia is the 143rd “freest” out of 179 countries – behind China and Syria … and sandwiched between most of the African continent’s worst regimes.  “Given the level of corruption, even in regards to the statistical data we received, it’s likely to fare even worse in reality,” said one Heritage economist.

What are some factors driving its poor ranking?  Corruption and inconsistent enforcement– meaning you will probably be funding your local Russian bureaucrats’ bad habits.  That, obviously, leads to considerable uncertainty in the decision-making process for entrepreneurs.  Investment in many industries is subject to approval and may be limited in scope and capacity.  The government still seems to have its hands in everything, making the bureaucratic stronghold tough to circumvent.

The State Department also recently pointed out the many “human rights abuses” committed by the Russian government.  Become too rich and powerful and you will likely end up like Mikhail Khordorkovsky who Amnesty International claims was imprisoned, and is still being held, for political reasons.  Write an article like … well … this one right here and you might end up in jail or “missing.”  Reporters Without Borders ranks Russia 140th in the world in terms of press freedoms, in close company with North Korea, China, and Cuba.

Sensational headlines aside, a substantial number of investors have turned to Russia over the last year.  In fact, Russia claims that its FDI increased by more than $4 billion(approximately 20%) when, at the same time, FDI in the U.S. and Germany has dropped 11% and 60%, respectively.  What’s that all about?

In a recent speech to the Foreign Investment Advisory Council (FIAC) of Russia, Prime Minister Putin, who is widely expected to be the next “self-appointed” President, gave his account of the reasons for such an unexpected increase in confidence.

“We believe that a crucial task is ensuring macroeconomic stability, so we intend to consistently pursue a responsible budget and financial policy.  This year, the federal budget will not be in deficit, this we can say with certainty,” said Putin.  Compare that to an expected $1.5 trillion 2011 deficit in the U.S., and one can see how investor faith might sway to the ex-Soviet state.

As inflation is expected to rise in the U.S. and Europe, Russia’s has slowed to record numbers.

“One of our priority tasks has been and still is fighting inflation. Last year, the inflation rate appeared to be fairly high, at 8.8%, but it was the lowest rate in Russia’s modern history,” added Putin.  “We expect it to be even lower this year.  At present, the accrued inflation rate in Russia is 4.7% . . . we project that [2011] will be a new all-time low for modern Russia.”

Not saying you should take Putin at every word, but that’s an impressive sales pitch. Russia’s numbers remind us of how spoiled we are in the U.S., where fears of a 4% inflation rate for the year have increased economic concern.  But, when your country’s inflation rate has plunged from an average of 175% between 1991 and 2010, one can see why 8% excites investors.

According to Ernst & Young’s yearly investor’s guide, the reason Russia might be performing well has more to do with government incentives.  Although consistently dominated by the extraction of natural resources such as oil and gas, government policies have led to greater increases in industries such as manufacturing, creating a “significant opportunity for Russia to develop a world-leading science and knowledge-based economy.” The Russian Embassy added that, due to these policy shifts, “Unemployment has dropped by 1 million people since January.”

Before you start changing your dollars to rubles, you might want to dig a little deeper. However disappointing, it’s not altogether unexpected that there are a number of contradicting stories to Russia’s “successes.”

Russia’s own state-owned news agency recently published an article claiming that the government’s numbers may be misleading and inaccurate.  The article claims that the recent growth in FDI was actually negated by investor’s withdrawals due to “political uncertainty amid the Eurozone’s debt problems.”  Makes you wonder if Putin’s ex-KGB, media-police cronies missed that piece.

Despite the rhetoric, manipulated statistics, and lack of free speech, the truth is that the old “evil empire” portrayed by Hollywood has given way to a much freer and more stable economy that even Rocky himself might invest his winnings in.

With more than 30 new billionaires since the fall of the Soviet Union, there seems to be room for success – as long as you don’t overdo it by Putin’s standards.

Justin Vélez-Hagan is Senior Contributing Writer and Commentator for Politic365.com.  He is also the National Executive Director of The National Puerto Rican Chamber of Commerce, an international developer of senior living facilities, and is a reservist in the U.S. Air Force.  He can be reached at JustinV@NPRChamber.org.