Credit Crisis: The Risk Hits Russia

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A trader in Moscow, where the market has plunged 60% since May Mikhail Galustov/Bloomberg News

President Medvedev, who pledges relief for banks, at his inauguration Sergei Karpukhin/Reuters

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To jump-start savings, the government has long toyed with pension reform, an issue that has reemerged on the political agenda in the wake of recent financial turmoil. But previous attempts have met with little success. Since 2004, Russians under 30 have been able to pay part of their pension contributions into private funds. But only 5% have opted to do so, largely because no one has bothered to explain the reform to the public. "Young people don't care much about pensions—there'll be time for that later," says Andrei Volkov, 24, a management student shopping at Moscow's Evropeisky Mall, a consumer paradise crammed with stores such as Zara, Benetton, and adidas. "We love to spend more than to save."

With domestic capital in short supply, Russia can ill afford repeated blows to investor confidence. True, seasoned investors play down the legal and political risks, saying they are justified by juicy returns. "Clearly it's ridiculous to expect the same kind of law and order in Russia that you have in Switzerland. It's an emerging market," says Boris Fedorov, a former finance minister who today is senior managing partner of UFG Asset Management, a leading Russian investment company.

In fact, many foreigners already invested in Russia seem more worried about Washington's hostile reaction to the military invasion of Georgia than about the increasingly authoritarian stance of Prime Minister Vladimir Putin and President Dmitry Medvedev. In September, American investors and the U.S. envoy to Moscow met for a breakfast at the elegant Marriot Grand Hotel on Tverskaya Street, just up the road from Red Square. The assembled managers were itching to hear what Ambassador John Beyrle had to say but complained loudly about Washington's tough line on Moscow's moves. "The mood in the room was quite combative," says Sergei Riabokybylko, who heads the Russian affiliate of real estate consultant Cushman & Wakefield. "Instead of aggressive rhetoric [by the U.S.], business here would like to see a more engaged discussion with Russia."

For investors with the stomach for rough-and-tumble emerging markets, Russia is not so much a wicked wolf that needs to be taught a lesson as a lucrative golden goose that needs gentle coaxing if it is to keep laying its precious eggs. Given the country's 140 million people and its growing middle class, money is still likely to be made even if growth slows. This year, for instance, Russia overtook Germany as Europe's largest car market, and foreign automakers are slugging it out. "The Russian market is tremendously important for us," says Heidi McCormack, director for new business development in Russia at General Motors (GM), which has seen its sales in the country jump by 40% in the past year, giving it some 10% of the market.

Despite Russia's continued attractions, though, veteran investors acknowledge they are nervously watching how the credit crisis will unfold both in Russia and abroad. That, they say, is a far more serious concern than the tensions over Georgia. And if existing investors are wary, Moscow will have an even tougher job persuading skeptical newcomers more easily spooked by the political and legal risks. All of which means the country may see the breakneck pace of development over the past decade slow markedly. "It looked like Russia was not going to get hit," says Andrew Somers, president of the American Chamber of Commerce. "Well, it has been hit. Just as in the U.S., the question is: When is this over?"

Business Exchange related topics:
Russian Economy
Russian Business
Credit Crunch
Global Recession
Eastern European Investments

Bush is BusinessWeek's Moscow bureau chief .