Top 4 risks for businesses in Russia for 2018
A year ago, as political and business analysts commented on Russia’s prospects in 2018, hopes were high that newly-elected US President Donald Trump would revert ever-deteriorating relations between Moscow and Washington, European leaders would follow the lead and Russia would be much closer to the back-to-business mode with the West which had ruptured after 2014.
These expectations were dashed, and it is hard to see how they might improve in 2018. It is time to re-evaluate risks for Russia and other former Soviet states that will affect doing business in the region next year. Here are the top five business risks for Russia and the CIS region as seen by my colleagues at Control Risks, the specialist global risks consultancy, in our annual RiskMap publication:
- Expansion of US sanctions on Russia: This is, perhaps, the most serious risk for foreign businesses. They will face increasing difficulties remaining compliant with international law should any of their local Russian partners fall under the purview of expanded sanctions that are likely in 2018. Partnership with, possibly, hundreds of Russian individuals close to the Kremlin and included on the special list, expected to be released by the US administration in early February, will place foreign companies in a ‘grey zone’ in which, while formally compliant, they may be working with entities singled out as potential targets for sanctions.
- Escalation of elite infighting to further erode corporate governance and increase investor risks: The latest ‘big press conference’ held by Russian President Vladimir Putin in December 2017 demonstrated that he has already strongly departed from the daily management of the government and is increasingly concentrating on foreign affairs. This has already created a power vacuum that is being filled by other actors with initiative and resources, and this process will only widen in 2018. Analysts point at state oil champion Rosneft, led by Putin’s former aide Igor Sechin, which has bashed major business conglomerate Sistema in courts; at the Russian Central Bank steamrolling over seemingly well-entrenched bank empires; and at the Federal Security Service that takes down top officials, including in the competing law enforcement agencies, with vengeance not seen even several years ago. The sanctions, economic slowdown and semi-isolation the Russian business and political elite found itself in after the conflict in Ukraine in 2014 have escalated competition among them as they seek to capture limited resources, from business assets to state budgetary funding. This trend is likely to prefigure conflicts, similar to that between Rosneft and Sistema, which may severely impact foreign business partners.
- Popular protests: The year 2017 saw the largest wave of political protests since 2012, and 2018 is likely to see this trend continue. Although the economy has performed a little better than most analysts expected, the poverty rate has been rising and budgets will be under pressure after the presidential election in March. And while Putin promises targeted social support to mothers and insolvent bank debtors, there is no doubt that much less popular measures, such as raising the retirement age and new requisitions and excises, are on the government plans for the next year. We expect that the recent trend of opposition-led as well as non-political protests will continue and even intensify, especially around the election date. While not posing a direct threat to businesses other than possible temporary disruption of operation in case rallies are held in the vicinity of operation sites, the government strategy of undermining such protests, mainly through increasing control over the internet, may hurt business of the international IT companies working in Russia.
- Terrorism: Home-grown terrorism, increasingly driven by self-radicalisation of youth in traditionally Muslim communities, and the expected return of fighters of the so-called Islamic State from Syria will continue to pose a security risk to Russia and Central Asia. To mitigate it, Russia will continue to share intelligence with Central Asian countries, bilaterally and as part of the Collective Security Treaty Organization, and will boost security at its borders. Security concerns will become a particularly important issue ahead of the FIFA World Cup, which Russia will host in June-July 2018. Security on public transport and in stadiums will be tightened in all 11 host cities, causing disruption to operations and movement. This risk of terrorism had also been on our list last year, though with the Russian security services having effectively quashed any terrorist activities in the run-up to the 2014 Winter Olympic Games in Sochi, the prevailing expectation then was that it would be properly mitigated in future. However, the terrorist bombing in St. Petersburg metro last spring and the ongoing nationwide campaign of bomb threat phone calls that the Russian security services embarrassingly cannot stop and have been investigating for several months dampen confidence in their effectiveness this time.