UK Warns Investors of Risk in Russia

Today the FT reported that the United Kingdom’s Home Foreign & Commonwealth Office (FCO) has stepped up its warnings to British businesses about the increased risks of investing in Russia, saying that the “challenges of market entry should not be underestimated.”

Deputy Finance Minister Sergei Storchak shows he can Blair bash with the best of them.

This is a remarkable and sudden change of direction from the FCO, which up until now has been very tame and tight-lipped on the political risk faced by foreign investors in Russia. Here, for example, is an excerpt from their country profile for Russia.

Notwithstanding current high growth rates, there are longer-term causes for concern about the Russian economy. Russia needs to maintain the confidence of domestic and foreign investors (which took a knock after the arrest of the head of Yukos in October 2003 and the gradual break-up of his company thereafter). Recent domestic policy developments in the gas sector, for example, notably the Gas Export law which enshrines Gazprom’s de facto export monopoly, contrast with the G8 principles Russia has signed up to. State structures remain little reformed. State influence, including direct ownership, in the economy is growing. Over regulation, uncertainty and corruption remain serious problems. The external trade surplus could fall sharply if oil prices do not rise further, creating liquidity problems. Major investment is needed across a range of sectors, including gas, where according to the IEA it is not certain that Russian supply will be able to meet both export and domestic demand by 2010. Russia’s demographic decline will present a growing economic and labour-force challenge.

The FCO’s warning comes in lockstep with critical comments made by Tony Blair, who issued a warning to Russia while speaking before MPs in the House of Commons: “I have good relations with President Putin. We want good relations with Russia. But that can only be done on the basis that there are certain shared principles and shared values. The consequence if there aren’t – there is no point in making hollow threats against Russia – is that people in Europe will want to minimise the business they do with Russia if that happens.” Russia didn’t take long at all to lob another zinger back. Deputy Finance Minister Sergei Storchak said “I doubt business will react to the rather emotional words of, after all, an ex-prime minister.” Ouch.