Is it still safe for Americans to invest in Russia?

Yet those who argue that recent events in Russia make it far too dangerous a place for Americans to do business are not making an accurate assessment of the political and economic situation in that country. The nationalization of key resource-based companies and the perceived inappropriate treatment of some foreign investors undoubtedly reflect an increase in Russian economic nationalism. However, this has not yet reached a significant level, nor is it likely to in the future. Russian authorities will not engage in massive nationalization of foreign assets because their economy remains dependent on foreign investment. Russia has large supplies of energy resources, but it needs to sell these to foreign consumers. Those resources will lose value if they are restricted to Russians. Far from seeking to be a self-contained, protected and isolated economy, Russia instead must rely on large-scale trade and foreign investment to sustain its economic growth.

Russia is the world’s 10th-largest economy and attracts large amounts of direct investment from the 27 members of the European Union -- especially Germany and Britain. And it is attracting considerable investment from Japan and China. The US concluded a bilateral trade and investment agreement with Russia in 2006, and is helping Russia apply to join the WTO.

In general, US officials encourage American investment in Russia, and also welcome Russian investment in the United States. It is unlikely the US government will take any action to offset its ongoing concerns about human rights violations in Russia or an increase in Russian economic nationalism. This long-run analysis of why Russia will remain an integral part of the world economic system, however, does not mean that specific investment projects can escape risk. Russia is still at an early stage of economic development. It is less than 20 years since the Berlin wall crumbled and the Soviet Union opened to market forces. Russia has found it difficult to develop the appropriate market-based institutions to match its acceptance of worldwide capitalism.

Instead, Russia remains an autocratic regime, and foreign investors must be careful in making commitments where contractual arrangements available elsewhere do not yet fully exist. Despite that, Russia is making progress on improving its institutional framework. Last summer it hosted the annual meetings of the G-8 leaders, and its businesses are becoming increasingly aware that they must conform to the market-based principles required by the WTO. To avoid losing out to eager European and Asian investors, Americans need to adopt a long-term view about investing in Russia. They should not be thrown off by the recent short-term political developments in Russia, but instead focus on build lasting personal relationships with that nation’s business and economics leaders.

Alan Rugman holds the L. Leslie Waters Chair in International Business at Indiana University’s Kelley School of Business. (charlotte.com)