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Why It's Even Riskier Business Dealing With Russia

NEW YORK (TheStreet) -- The St. Petersburg International Economic Forum kicks off May 22 in Vladimir Putin's hometown.

While the Russian president will be showcasing  Russia as the place to seek a plethora of economic opportunities, his opponents -- most notably the Obama administration -- will be seeking to spoil his party.

The White House has been working the phones to ensure that none of the top executives from American companies show up. At last count, the head honchos of Goldman Sachs (GS), Pepsico (PEP), Morgan Stanley (MS) and Visa (V) had bowed out. More are expected to follow suit with daily reminders from President Obama's top aides that any American participation in the current climate would be inappropriate.

That's not scaring companies from other countries, though. In a move that will surely infuriate some American diplomats and add to the image of them being fickle allies, France is expected to send the largest contingent of CEOs to the three-day summit.

With investments close to $16 billion in  Russia, France is in no mood to jeopardize its status as the second-largest investor in the country. In 2012 the French automaker Renault, in partnership with Nissan (NSANY), acquired a controlling stake in AvtoVaz, Russia's largest car manufacturer but one with a dubious reputation for producing obsolete cars like the Lada sedan.

Vladimir Putin notably featured in a photo op with a Renault F1 car, speeding around in a race track near, predictably, St. Petersburg. In Russia, doing business without political patronage is unheard of and French companies seem to have learnt that lesson pretty fast.

What will be interesting to observe is how French politicians deal with French defense companies like DCNS (currently building helicopter carriers for the Russian Navy in a $1.7 billion deal.),  which in the quest to fatten their balance sheets may end up giving Russia the hardware it needs in a shooting war with the West.

Despite Russia's macho public posture that it is unfazed by the economic warfare unleashed against it over its actions in Ukraine, its economy doesn't radiate the same confidence. In 2013 the economy plummeted to a 1.3% GDP growth rate from an already mediocre 3.4% in 2012.

While the St. Petersburg event may succeed in delivering a few high profile investments, Russia's economic problems are rooted in deep structural issues. Growth comes primarily from the huge energy sector, but infrastrastructure bottlenecks have slowed down other industrialization.

Russia's labor force, while huge and relatively cheap, is also lower in productivity than its Western counterparts, partly due to poor skills training, and partly due to lack of investment in technology.

These challenges are reflected in the steady fall in the ruble's value. The Russian central bank has had to raise interest rates to prop up the severely weakened currency. That increases the cost of doing business for Russian businessmen, and with inflation having risen above 7%, it may not be the end of the rate hikes.

Putin and his inner circle, therefore, will be hoping for a second wind in Russia's second-largest city.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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