Do Business in Russia? Think Again

Last Updated Apr 17, 2008 3:02 PM EDT

Putin Russia Business Czar FlagCEOs are constantly barraged with pitches about the best places for direct foreign investment or trade. These include BRIC countries (Brazil, Russia, Indian and China).

While Russia has a promising, fast-growing economy, the authoritarian policies of the Vladimir Putin regime are enough to give pause.

In dollar amounts, much of the direct foreign investment has gone into crude oil and natural gas extraction and processing, But Putin has reneged on some major deals with foreign firms over the past several years as part of the creeping re-nationalization of some of the country's largest industrial sectors.

Reading the tea leaves and Forbes magazine, I see some glimmers of hope. In its most recent edition, Forbes lists the world's biggest billionaires. Russia does well, with 87 overall, compared to 469 in the U.S. Most of Russia's big money people are based in Moscow (74), more than in New York (71) or London (36). Many of them, such as Vladimir Potanin, one of the original "oligarchs" who sprang from the 1990s privatization programs, got rich by buying up firms involved in natural resources extraction and trading.

Back when the 1990s when Russia was undergoing its massive conversion to capitalism (or "wild" capitalism as the Russians called it), foreign correspondents like me who were based in Moscow wondered when Russia would turn around to actually making goods, other than weapons, that the world like want to buy. Simply selling oil and gas is something any Third World nation could do.

Putin's economic successes and his crackdowns against free speech have been fueled by petrodollars and petroEuros. A number of Russian experts have traced periods of Russian aggressiveness to spikes in world oil prices.

This week came news that Russia's oil output is slowing for the first time since the 1990s. The problems are not supply, but technology since Russia has tapped many the easy-to-get field. To get the rest, they'll need foreign technology. The oil patch slowdown will also force Russia to use its creative energies to make more sophisticated things, be they widgets or software.

For another sign of change, take a peek at Forbes again.Of the five richest newcomers in Europe, the three Russians on the list-- Kirill Pisarev, Yuri Zhukov and Mikhail Balakin -- are involved in construction. That's promising. Russia is ready to leap into an ambitious $1 trillion building frenzy. Russia needs everything from rebar to cement to construction management to rebuild its ailing infrastructure. They are going to have to make nice if they want foreign help. And in time, they may advance even farther to making more complex products.

C-Suite people involved in global trade and investment might take note.