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Evaluation of Russian investors

Describe about the Response for Russian Investors to the Declining Exchange Rate of the Ruble in Comparison to Euros?

According to reports of Financial Times, the investment climate of Russia is favorable for other companies because Russian Stock market is the cheapest in the world in terms of equity (www.ft.com, 2015).  Majority of the Russian population is educated and possess huge amounts of natural wealth. The advancement in technology in Russia has been possible for the angel investors of Russia. Angel, investors are the individuals with high amounts of financial resources who are eager in funding start up ventures in return of a significant percentage of returns (www.sec.gov, 2013). The presence of huge number of angel investors in Russia has helped the country to build technological projects like Kaspersky Lab, Boeing aircraft factory, Microsoft and Massachusetts Institute of Technology (Yergin and Gustafson, 1993). The Russian investors are also noted to take credit loans. The downgrade in the Russian credit has made the investors notable about the cons of the credit facilities. The closure of the foreign capital markets is also making it necessary for the angel investors of Russia to invest in the capital markets because in the current scenario it is difficult for the Russian companies to get financing. Foreign investment opportunities are strong in Russia compared to other countries because of the cheap prices of the investments (www.ft.com, 2015).

European union ranks as the number one trading partner of Russia accounting for around 41% of the trade relations between the two countries. Apart from EU some of the other sectors where Russia makes investment are China, USA, Japan, Turkey, Switzerland, South Korea etc. Russian investment is also recorded in UK. Russia made $ 11 bn investment in different industries of UK. The UK organizations generally benefits from Russia’s financial system and favorable tax conditions. As per the survey reports of UNCTAD, Russia was ranked as the eighth biggest investor economy in 2012 after US who was ranked first and UK who was ranked fifth (unctad.org, 2015). The capital investment options are risky in Russia because for the capital investments the Russia investors will have to calculate the Net Present Value (NPV) for each investment.

Russian investment is majorly seen in the energy sector of countries like US, UK and China. Since majority of the investors in Russia are angel investors with huge amount of financial resources hence they majorly invest in the star up company projects that may generate initial loss for the investor but will generate high profits on the growth and maturity periods (ccsi.columbia.edu, 2015)

Apart from these countries, Russia has also made considerable investments in the electricity sector of Georgia. The reports of the World Bank suggest that the lack of transparency in the electricity sector of Georgia and the presence of friendly laws concerning the foreign investments in Georgia are the major reasons behind the motivation for the Russian investors.

Russia’s investment in Cyprus to help the country to overcome the debt crisis has been one of the trade relation strategies of the Russian investors. The investors in Russia invested around $33 billion in Cyprus and in return, Cyprus invested around $ 65 billion in Russia. The mutual investment and the promise of Russia of financial help for Cyprus in overcoming the after effects of debt gave rise to a mutual trading relation between Russia and Cyprus (BBC News, 2013).

Sectors of Russian investment

As per the Forbes, the consumer staple industry, is the most favorable industry that generates higher returns compared to financial sector. Apart from these, sector the other sectors like the health and body care products, clothing companies, beverages and home good products are also considered to be some of the good return supplying sectors. According to Frolov (2011) the agricultural sector, the FDI and the energy sectors are amongst the sectors that provides good returns to an investor. Although investment in bonds and common stock can provide liquid returns to the investor, however these forms of investment do not provide good return. Some of the low beta sectors like Consumer staples, healthcare, utilities and telecommunication provide good returns to the investors (European Dept, 2013).

As per the reports of the Morning Star the average returns that the Russian investors may expect from investment in these sectors of USA and EU are as follows:

Sectors

USA

EU

Banking and financial sector

-6.30

-3.83

Oil industry

9.1%

8.59%

Software

23.33%

32.01%

Agriculture

0.31%

-0.17%

Table1: Average returns in respective industries

(Source: News.morningstar.com, 2015)

According to Kopsov (2010) the investments that can be easily converted into liquid cash through sell or can be easily withdrawn from the banks are generally termed as the liquid investments. The major sectors where the investor may expect the investment to become liquid are generally the investments in stock, mutual funds, liquid assets like deposit of cash in banks etc. Russia has huge opportunities in China. The huge population of China has made the country economically liquid for the investment purpose. Moreover the political and military risks are also low in China hence the investments in the bonds and debentures can prove to be liquid investments for the investors. Apart from that the other liquid sectors of investment are the energy sectors and the agricultural sectors.

Russia – EU relations

The Russian federation and EU are major partners in a number of key sectors namely economy, energy and security. Barysch, Coker and Jesien (2011) opined that the political relations between the two countries have strengthened due to their joined effort in eradicating the migration issues, organized crime and terrorism. Although the Russian and EU economic relations are expected to grow however the political relation is becoming unstable. To maintain the trading relations between Russia and EU the norms of the 1994 Partnership Co operation Agreement are accepted. The political scenario is controlled from four different prospects namely economy and environment, freedom, security and justice, external security and research and education. Russia is highly dependent on EU for the investment in the oil and gas sector. Hence, the country has to maintain good political relations with EU so that the potential oil investments are not hampered. However, the political situation between the two countries worsened following the Ukraine crisis. EU issued certain regulations against Russia that restricted Russia’s trade relations with EU. Russia’s negotiations for joining of OECD and International Energy Agency were denied by EU. Further, the EU-Russia summit was called off and the Russia visa issues were suspended (Cleutinx & Piper, 2008).

Both Russia and United States maintains a diplomatic relationship in terms of politics and economy. However in terms of economic relations Russia and US shows an unbalanced relationship. Russia is the 20th largest trading partner of US and on the contrary US is the fifth largest trading partner of Russia. This indicates that Russia is importing more compared to the export rate with USA. The political turmoil arises due to the internal intervention of US on the taxation and duty levied systems of Russia. Initially in the 1947 the struggle between the US and Russia for domination in certain sectors gave rise to the cold war. Later the adoption of the different treaties contributed in making peace between the two countries. Since Russia is famous as a supplier of arms and ammunitions, hence the political military sphere is the most important component of Russia – US relations (Kaskarelis, 2010).With the advent of the Kyoto Protocol the EU-Russian relationship in terms of investments were strengthened. The EU-Russian energy dependency has made the political and economic conditions strong between the two countries (Trenin, 2007).

Areas of Russian investment

The US-EU relation is important in respect of trade and political issues however; both the countries are natural allies in the matter of legal proceedings (Jovic-Lazic, 2012). The Relation between these two countries are based on the Transatlantic Declaration of 1990. The guideline of this regulation states that both the countries will adopt a diplomatic relation in politics, economy, education, science and culture. The two countries combined together represent around 60% of the global GDP and 33% of the international trade.

The Transatlantic Economic Council established the direct economic regulations between the two countries. Some of the existing issues between the two countries are regarding arms and ammunitions supply, use of genetically modified foods, defense contracts, Boeing and Airbus subsidies and capital punishments. The arms and defense help from Russia to EU and the biasness of EU towards the Russian airplane maker Boeing in terms of defense contract sanctions were matters of political turmoil between EU and US (Cameron, 2010).

The investment in the banking and financial sectors of USA can yield liquid returns however the stringent economic policy of EU shows that the investment in the banking sector will not be fruitful. Moreover, the agricultural investment and the investment in the energy sector are both profitable in the EU sector compared to USA. The European Energy Efficiency Fund is also generated in EU to generate investments in the states under EU. The energy sector in US involves the investment by the private s well as the public investors. Hence the investment strategies are diverse in US (Koopmann, 2004).

Game theory is well suited for the adverse conditions that arise in a particular situation. Investment is a Zero sum game that means that for every winner there will be a loser. The following model shows the conditions that a Russian investor may opt for in order to become a player in the share market (Alpcan, Buttyán and Baras, 2010).

Two scenarios in the game theory:

Scenario 1: Russia should invest

Scenario 2: Russia should not invest

If Russia decides to invest the there are three areas for investment namely China, EU and USA. Based on the sub scenarios the game theory will set the following conditions namely:

  • Russia’s investment in China
  • Russia’s investment in EU
  • Russia’s investment in USA

Moreover, the investment decision in these there countries will depend upon the major areas of investment. The major investment sectors for Russia that are identified are as follows namely Banking, agriculture, financial investment, durable goods, oil industry and software. Thus, the final conditions for the theory will be as follows:

Condition 1: Russia’s investment in China’s agricultural sector

Condition 2: Russia’s investment in China’s oil industry

Condition 3: Russia’s investment in China’s banking sector

Condition 4: Russia’s investment in China’s durable goods

Condition 5: Russia’s investment in China’s software

Condition 7: Russia’s investment in EU’s agricultural sector

Condition 8: Russia’s investment in EU’s software

Condition 9: Russia’s investment in EU’s banking sector

Condition 10: Russia’s investment in EU’s durable goods

Condition 11: Russia’s investment in EU’s oil industry

Condition 12: Russia’s investment in USA’s oil industry

Condition 13: Russia’s investment in USA’s durable goods

Condition 14: Russia’s investment in USA’s banking sector

Condition 15: Russia’s investment in USA’s software

Condition 16: Russia’s investment in USA’s agriculture

Reference list

Alpcan, T., Buttyán, L. and Baras, J. (2010). Decision and game theory for security. Berlin: Springer.

Barysch, K., Coker, C. and Jesien, L. (2011). EU-Russia relations: time for a realistic turnaround.European View, 10(1), pp.137-138.

BBC News, (2013). Why so much Russian money in Cyprus?. [online] Available at: https://www.bbc.co.uk/news/business-21831943 [Accessed 14 Mar. 2015].

Binmore, K. (2007). Does game theory work?. Cambridge, Mass.: MIT Press.

European Dept, I. (2013). Russian Federation. Washington: International Monetary Fund.

Financial Times, (2015). Russia fund reveals target sectors - FT.com. [online] Available at: https://www.ft.com/intl/cms/s/0/058f096c-9dbc-11e0-b30c-00144feabdc0.html#axzz3ULgHbHgN [Accessed 14 Mar. 2015].

Gudkov, F. (2013). Investments in Innovations—or Russian "Investment Roulette". Problems of Economic Transition, 56(6), pp.32-39.

Investment from Russia stabilizes after the global crisis, (2015). ccsi.columbia.edu. [online] Available at: https://ccsi.columbia.edu/files/2013/10/Russia_2011.pdf [Accessed 14 Mar. 2015].

Cameron, F. (2010). The politics of EU-Russia energy relations. EU-Russia Energy Relations. OGEL collection, Euroconfidential, 25-38.

Cleutinx, C., and Piper, J. (2008). The EU-Russia energy dialogue. Pipelines, Politics and Power: The Future of EU-Russia Energy Relations, 25-33.Kaskarelis, V. (2010). The Nature and Scope of the US-EU Relationship. Mediterranean Quarterly, 21(1), pp.15-24.

Koopmann, G. (2004). The EU, the USA and the WTO — An uneasy relationship. Intereconomics, 39(2), pp.58-59.

Trenin, D. (2007). Russia redefines itself and its relations with the West.Washington Quarterly30(2), 95-105.

News.morningstar.com, (2015). Morningstar.com: Industry Returns. [online] Available at: https://news.morningstar.com/stockReturns/IndustryTop100Stocks.html?industry=10101001 [Accessed 16 Mar. 2015].

unctad.org, (2015). WORLD INVESTMENT REPORT InvestIng In the sDgs: An ActIon PlAn. [online] Available at: https://unctad.org/en/PublicationsLibrary/wir2014_overview_en.pdf [Accessed 14 Mar. 2015].

www.ft.com, (2015). Russian investment. [online] Available at: https://www.ft.com/intl/cms/s/0/4cc3f454-86a8-11e4-9c2d00144feabdc0.html#axzz3ULgHbHgN [Accessed 14 Mar. 2015].

www.sec.gov, (2013). Angel Investors – Critical Initiators of Startups and Job Creation. [online] Available at: https://www.sec.gov/info/smallbus/acsec/acsec-091713-verrill-hudson-slides.pdf [Accessed 14 Mar. 2015].

Yergin, D. and Gustafson, T. (1993). Russia 2010. New York: Random House.

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