The Russian Market: Currency and Financial Risks

Executive Summary

The Russian market is very attractive for investors because of the size and purchasing power of its consumers. The recent government policies that opened the Russian market to international society have a positive impact towards having a strong economy. However, the financial system of the country has remained poor for many years, making the ruble weak against the US dollar and other world major currencies.

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The economic crisis that the country experienced, especially in 1998, weakened the ruble to US dollar by almost 70%. This posed serious financial risks to business units in this country as they had currencies whose purchasing power had been reduced by 70%. The national policies that focus more on war than developmental projects have worsened the ruble market. The current crisis between Russia and the West over Crimea is only making the situation worse. For this reason, investing in this country is risky and requires strong measures that can cushion the firm against financial risks.

Introduction

Russian market has been one of the most attractive markets in Europe over the years. The country is rich in minerals that make the cost of energy oil cheap. Analysis into the business environment in this country shows that the government has made huge strides towards opening the Russian market to the world. A report by Ledeneva (34) shows that the number of international firms coming into this market has increased by a huge margin. The size and purchasing power of the market is also attractive. However, entry into this market should be done with caution. The Russian economy has been marred by economic challenges that have not only affected its currency and the entire financial system, but also the ease of doing business in the country. This research is focused on determining the level of currency and financial risks associated with the Russian market.

Discussion

In order for our firm to get into the Russian market, there is a need to understand the history of the financial system and its current status in order to offer guidance in the decision making process. It is important for the top management to know the history, and the current status of the financial system in this country in order to make a prediction about the future. According to Robinson (27), Russia is one of the leading countries in the world in terms of mineral endowment. It is ranked the second largest producer of energy in the world, beating the United States to the third position. This has massively helped the economy of this country even in cases of economic crisis. It is the main supplier of energy to the European Union nations, a fact that has seen the cost of energy gone down in the country as compared to other European states.

The recent government policy that promotes an open Russian market has also been praised by foreign investors that could not invest in the country because of the previous bottlenecks. These positive business environmental factors may convince investors that this is the best country in which to invest in the entire Europe. However, some of the facts mentioned above must be treated with some caution. The recent change of business laws has made it easier to invest in the country than it was previously. This does not mean that these policies are the most attractive in the entire Europe. (Schermerhorn, 53)

The financial system of this country over the past twenty years and the strength of its currency have been worrying. After the collapse of the Soviet Union, Terterov (64) notes that Russia continued to use ruble as its main currency, eliminating banknotes. After the collapse of the Union, Russian imports rose by a high margin, while its exports reduced. The country was forced to import sophisticated machinery, specialized services, among other products.

This increased the demand of the US dollar in the country. Local business units were forced to outsource some services outside the country, and this further weakened the value of ruble. This currency risk was worsened in the 1990s due to the tension that existed between Russia and the United States. The Russian government gave excessive emphasis on this ideological war, ignoring developmental needs. One of the most shocking incidents that happened to the Russian currency was in 1998 when the country suffered from the economic crisis.

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According to Robinson (77), the currency lost 70% of its value to the US dollar. This inflation had a ripple effect that continued to affect the quality of the ruble several years later. From 2005 to 2008, there was an attractive growth of the ruble market following interventions made by the government to reduce currency risks that local firms faced. However, the 2008-2009 world economic recessions affected this growth. This did not have a serious impact on the currency because it affected various other major economies in the world, including the United States.

The recent decision by the Russian government to annex Crimea from Ukraine has worsened the value of the ruble in the financial market. The Russian government has been subjected to economic sanctions by the West. Europe, which is the major market for Russian exports, is currently re-evaluating its economic relations with this state. Some of the leading businessmen closely related with the Russian president, Vladimir Putin, have also been issued with travel bans to countries hosting their business. The country is in chaos, and the business environment is the most affected by this conflict. The cordial relationship between Russia and China has not helped stabilize the economy of this country during the on-going conflict. Schermerhorn (73) notes that the Russian ruble market has remained volatile for a long period.

The financial system in this country is partly to blame for the volatility of the ruble market. According to Terterov (56), financial institutions in Russia are among the active borrowers on the Western money markets. The burden of debt makes this currency become even weaker than the period during Cold War. The management of this firm must, therefore, be aware that it is getting into a market that has a volatile ruble market. The currency has remained weak, not because of the devaluation, but because of poor financial system, and the weak economy that focuses more on war than development projects.

Recommendations

This firm should consider taking the following recommendations.

  • Entry into the Russian market should be delayed till the end of the current crisis over Crimea. These resources should be channeled to the emerging markets in South America, Asia or even Africa.
  • When entering the Russian market, the management must be ready to counter the financial risks mentioned above.
  • The management should consider a strategic alliance with firms that are already in this market as its entry strategy into this volatile market.

Works Cited

Ledeneva, Alena. Russia’s Economy of Favours: Blat, Networking and Informal Exchange. Cambridge [u.a.: Cambridge Univ. Press, 1998. Print.

Robinson, Neil. The Political Economy of Russia. Lanham: Rowman & Littlefield Publishers, Inc, 2012. Print.

Schermerhorn, John. Management. Hoboken, N.J: Wiley, 2010. Print.

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Terterov, Marat. Doing Business with Russia. London: GMB Pub, 2004. Print.

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