Question

Assume that you are a manager at a firm interested in entering Russia. As part of your initial analysis, top management would like to know about the level of currency and financial risks associated with the Russian market.

Answer / Do the following:

a.   Using resources at globalEDGE™ (globaledge.msu.edu), write a short report on the current status of these risks, as well as the state of the Russian financial system and historical exchange rate stability.

b.   Based on these findings, what is your recommendation?

2. The International Monetary Fund (IMF) lists its purposes as follows: (1) to promote international monetary cooperation via consultation and collaboration on international monetary problems; (2) to facilitate the expansion and balanced growth of international trade; and (3) to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

Answer 1

a.   Using resources at globalEDGE™ (globaledge.msu.edu), write a short report on the current status of these risks, as well as the state of the Russian financial system and historical exchange rate stability.

Report on Currency and financial risks associated with the Russian Market

Russia is a country located in northern Eurasia bordering the Arctic Ocean between Europe and the North Pacific Ocean. Neighboring countries include Azerbaijan, Belarus, China, Estonia, Finland, Georgia, Kazakhstan, North Korea, Latvia, Lithuania, Mongolia, Norway, Poland, and Ukraine. The government system is a federation; the chief of state is the president, and the head of government is the premier. Russia has transitioned from a centrally-planned economy to a more market-based economy in which many state-controlled firms have been privatized and sectors of the economy are liberalized. Russia is a member of the Asia-Pacific Economic Cooperation (APEC) and the Eurasian Economic Union (EAEU). On the political front,

Mr. Vladimir Putin has remained is the current President of Russia and has ruled it more or less for over a decade now.

Russia is the world's largest exporter of natural gas and the second largest exporter of oil. On the back of a tight fiscal and monetary policy, coupled with higher oil prices, Russia returned to GDP growth of 1.7% in 2017 and the economy is expected to expand at a comparable or slightly slower pace in 2018. Over 1,000 American firms of all sizes continued to do business in Russia, given its 142 million consumers, $27k+ GDP per capita (as measured in purchasing power parity), a growing middle class and highly educated and trained workforce. Both Western and Russian firms approach 2018-2019 eager to capitalize on opportunities but cognizant of the significant challenges facing Western market participants. Stable oil prices, a less volatile ruble and a return to growth in some sectors will likely keep the Russian economy growing in 2018, albeit slowly. Early in 2018, Standard & Poors and Moody’s assigned Russian debt ratings of BBB- (lower investment grade) and Ba1 (a step below investment grade) respectively. Two-way U.S.-Russia trade reached over $24 billion in 2017, 18% higher than 2016 but well off its peak of $38 billion in 2013. American investment in Russia was about $9 billion in 2015. Numbers aside, American firms view the Russian market as a long-term, strategic play, given its population, natural resources, growing consumer class and access to a low-cost labor force. The Busines Climate is rated as 'C' meaning - The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.

Currency Risks - Currently the exchange rate is 1 USD = 66 Russian rubles. The ruble exchange rate saw massive depreciation when the Soviet Union collapsed in the 1990's. However, since 2003 it has depreciated in a more orderly manner from 1 USD = 29 rubles in 2003 to 1 USD = 66 rubles (approx 50% depreciation over a period of 15 years). This shows that its economy has stabilized and currency risks are minimal