Following the recent Russian/Georgian conflict in Tbilisi, the threat to emerging former Soviet markets from falling foreign direct investment (FDI) is critical to future regional economic expansion and growth. This is according to the latest findings of the World Risk Review, a country risk ratings guide produced by leading specialist broker and risk consultant Jardine Lloyd Thompson (jltgroup.com).
“There is the very real threat that foreign direct investment in countries that make up the former Soviet Bloc could severely decrease,” warns Dr Elizabeth Stephens, Political Risk Analyst, Jardine Lloyd Thompson (jltgroup.com). “As Russia exerts its military force in Georgia, the Kremlin sends a thinly veiled message to neighbouring territories, indicating that Prime Minister Putin and the Soviet government will not shy away from military force, in order to protect local interests and its regional sphere of influence. Naturally, this threatens the emergence of these fledgling economies, as they enter the next important stage of economic growth.
“With Western investors seeking to mitigate any further potential risk through civil unrest and business disruption, the recent conflict in Georgia demonstrates the fragile political balance within the region and demonstrates Russia’s economic muscle within the wider European economy.”
As territories such as Ukraine, Kazakhstan, Kyrgyzstan and Azerbaijan brace themselves for further uncertainty, key concerns and priorities for the regions include:
• Disturbingly, Ukraine has the most similar risk profile to Georgia in terms of FDI. Like Georgia, Ukraine has a divided population with support for both Moscow and the West.
• The balance of power in Ukraine alternates between pro-Western and pro-Russian factions, the supremacy of which impacts on the investment climate. It was only last year that the pro-Russian prime minister changed the terms of trade for international commodity traders exporting wheat from the country - disrupting trade and resulting in heavy claims in the insurance market.
• The recent conflict in Georgia has demonstrated that Russia is prepared to use military ports to secure the Crimean ports upon which its Black Sea fleet depends. Now that this is recognised as a potential flashpoint, Western investors are getting nervous.
• Russia has signalled that it will not tolerate European efforts to establish oil and gas pipelines that bypass Russia. The demonstration of Russian power will be noted carefully by Caspian energy producers, notably Kazakhstan, where about 30% of the population is still ethnic Russian.
• In contrast, the Stans are not part of an extended Europe and Russia has not indicated that it wants to 'take them back' in quite the same way.
• It isn't so much political instability that is the risk to foreign investment but government changes to the trading and investment environment. The risk is that governments will renegotiate contracts or expropriate assets with foreign companies investing in the resources sector.
• In many central Asian states, recent changes to the taxation structure have significantly undermined the interests of western businesses operating in the region.
• The increasingly difficult nature of the Uzbek investment climate was recently reinforced, when a court ruled that US gold producer, Newmont Mining, must pay US$48m in corporate tax arrears.
Azerbaijan & Kyrgyzstan
• Here, the Dutch energy company Azpetrol alleges that the government has illegally expropriated company property without compensation, in violation of the Energy Charter of Azerbaijan. The government has targeted three other European companies since late 2005 and contracts are increasingly coming into question.
• Similar obstacles hinder trade and investment in Kyrgyzstan, where regime change has diminished opportunities for western companies in favour of regional investors. President Kurmanbek Bakiyev, is virulently anti-American, thus compounding the obstacles for western companies operating in a country with a fragile and opaque legal system.
Designed to assist corporations, financial institutions and others involved in international trade and investment develop robust risk assessment strategies, the World Risk Review evaluates 197 countries, according to nine different perils, every month. The risk ratings model is regularly upgraded, downgraded and evaluated to provide a unique insight and analysis into individual countries and regions around the world.