Country Report September 24, 2009, 5:00PM EST

The Peril and Promise of Investing in Russia

It's still risky, but for global corporations, the country is simply too big—and too rich—to ignore

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A new Moscow HSBC branch, part of a major Russian expansion for the bank James Hill

By Carol Matlack

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Why would anyone invest in Russia? The economy is expected to shrink 8.5% this year, and will be slow to recover its momentum. Inflation is in the double digits. Even President Dmitry Medvedev calls corruption in his country "endemic." And sophisticated investors know all the horror stories of operating there: BP (BP) locked in headline-grabbing clashes with its joint venture partners. Royal Dutch Shell entangled in endless charges of violating environmental laws. William Browder, a pioneer investor in Russia, mysteriously denied re-entry into the country while his Russian fund is stripped of its assets. Swedish retailer Ikea suddenly blocked by authorities in Samara from opening a huge store it had just built, ostensibly for violating the local building code.

And yet many multinationals—big, battle-scarred companies, veterans of coups in Brazil and hyperinflation in Turkey—refuse to pull out of Russia. Instead they're digging in for the long haul. John Deere (DE), Unilever (UN), and HSBC (HBC) all have begun major Russian expansions in the past few months. Wal-Mart Stores (WMT) has an advance team on the ground as it mulls opening a Moscow location, following French hypermarkets Carrefour and Auchan. On Sept. 1, Topeka (Kan.)-based Collective Brands (PSS) announced it would open 90 Payless ShoeSource outlets across the country over the next five years. "Among emerging markets, Russia has moved to the top of our list," says Chief Executive Matthew E. Rubel. Even companies that have been beaten up in Russia, like BP and Ikea, say they'll keep investing.

For major global corporations, Russia is simply too big and too rich to ignore. Abundant reserves of oil, metals, and timber still lure multinationals eager to export those commodities, even though such investments are often fraught with difficulties. But Russia is not just a play for resource companies. Eighteen years after the fall of the Soviet Union, 140 million voracious consumers beckon. Demand for everything from kitchen cabinets to pharmaceuticals is still strong—and Russians have the petrodollars to pay for them. Disposable household income in Russia is 30% higher than Brazil's, almost four times China's, and 10 times that of India (chart).

The Kremlin's $280 billion stimulus plan, fueled by oil and gas money salted away in better times, is spurring demand. That's a boon for companies such as Unilever, which reported "strong double digit growth" in Russia during the first half of the year. The Anglo-Dutch company has eight factories in Russia and recently broke ground for a new $140 million ice cream plant and distribution center in Tula, 120 miles south of Moscow.

Russia's Soviet tradition of education—superb in math and the hard sciences, excellent in languages—still produces plenty of brainy workers. About 20% of working-age Russians have university degrees, not far below the European Union average of 24%. While Russian salaries had been rising sharply before the crisis, they've now flattened out, and multinationals can still find workers for a fraction of the cost in the West.

Consider IT giant Intel (INTC), which moved into Russia in 1999 and since then has invested $800 million. It now employs more than 1,000 engineers at four research centers, including its largest software research and development group outside the U.S.