Report

Cloud of Uncertainty Lingers Over Business in Russia

Cloud of Uncertainty Lingers Over Business in Russia

Russia has escaped the immediate sanctions threat from the West, but ongoing instability in Ukraine could still keep foreign investors on the sidelines.

"The endgame is still not clear and the economy is still under some pressure, still slowing," said Win Thin, who advises investors as the global head of emerging-market strategy at Brown Brothers Harriman & Co. "There’s still too much baggage right now for people to jump back in."

Though the risk that the West would freeze more Russian assets for interfering with Ukraine’s presidential elections has passed, U.S. and European leaders are still keeping sanctions on the table as they wait to see how Moscow responds to continued unrest in eastern Ukraine. U.S. Defense Secretary Chuck Hagel said Friday in Singapore that Russia has removed most of the troops along Ukraine’s border, a development he called "promising," though he also said thousands of soldiers still remain. The fighting continues, however: Acting President Oleksandr Turchynov said Thursday that pro-Russian rebels shot down a military helicopter near Slovyansk, killing at least 14 people, including a general.

For companies and investors that are waiting for the conflict to die down before they make decisions about what to do next, the continued upheaval means more uncertainty.

Investors moved $50.6 billion out of Russia in the first three months of 2014, more than the $59.7 billion during the whole previous year, according to Bloomberg. That figure includes trade flows, foreign investors pulling out of the country, and Russians moving their money into other currencies because they were worried about the falling value of the ruble. The ruble fell 5.3 percent this year against the dollar, but it has rebounded 2.8 percent in the past month.

"I think those that are seeking clarity are going to be disappointed," said Steven Pifer, a former ambassador to Ukraine and a senior fellow at the Brookings Institution.

"Nobody wants to jump back in too quickly," added Matthew Getz, an attorney with law firm Debevoise & Plimpton in London who advises companies on sanctions compliance. "The fact that it’s still being considered is still making people wary."

Getz said that some clients are writing clauses into their loan agreements to allow them to cancel the contracts if the Russian company is sanctioned. And Russian businesses are looking into the possibility of avoiding transactions in U.S. dollars, he said, so that they will be out of reach of any future restrictions coming from Washington. Because the U.S. dollar is the dominant currency for global business, many transactions that don’t otherwise involve a U.S. company are routed through American banks, and that point of contact with the U.S. financial system makes the deals subject to Washington’s sanctions. Routing the transaction through another country would be one way to avoid them.

"Some companies [have] talked about telling all their counterparties that they’re going to do all their transactions in other currencies, like Singapore dollars," Getz said.

The Ukraine crisis will likely continue to be a drag on the Russian economy, which was already hurting even before the West started freezing the assets of powerful Russian oligarchs after the takeover of Crimea. Some Russian start-ups are pulling up stakes and heading to Europe to run their businesses, according to a USA Today report. Yoanna Gouchtchina, for instance, decide to move her software company ZeeRabbit from Moscow to Berlin, after the Crimea invasion.

"Right now it feels like just the beginning of the end of those years where we were building the Russian economy," she told USA Today.

But for some financial firms, the bad news is creating an opportunity to buy stocks on the cheap.

"The crisis will likely have a negative impact on Russia’s economy but increasingly attractive valuations provide a good buying opportunity," T. Rowe Price portfolio manager Ulle Adamson said in an email. Adamson, who runs the company’s Emerging Europe Fund, said she is maintaining the fund’s stake in the Russian stock market and buying more shares of companies she considers strong, while prices are low.

Bill Reinsch, head of the American trade association the National Foreign Trade Council, said companies will be cautious but their degree of caution will depend on the industry.

"The one sector that will probably move quickly is the energy sector," he said. The Financial Times reported Sunday that BP confirmed its commitment to a shale oil deal with Russian state-run company Rosneft at a major economic conference in St. Petersburg that U.S. officials had urged Western companies to boycott. The deal was signed even though the United States sanctioned the head of the Russian company, Igor Sechin. The freezing of Sechin’s assets didn’t extend to Rosneft.

Washington-based trade lawyer Doug Jacobson said he gets lots of inquiries from clients about Russia, but he doesn’t always have an answer for them.

"They’re asking me what’s going to happen and no one knows," said Jacobson. "That’s the worst possible thing for business, is just to have uncertainty."