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Will Business Interests Limit Russias Aggression in Ukraine?

While tensions mount over Russia’s meddling in Ukraine, many industry watchers are wondering what will become of the investments and commitments made in that part of the world.

Will Russian President Vladimir Putin’s naked power grab undermine his efforts to transform the nation into a trustworthy investment partner, or will cooler heads prevail? Before assuming the worst, it’s important to keep in mind several things.

For starters, Russia 2014 is hardly the adversary the West faced during the Cold War in the 1970s and 1980s. Both by law and by agreement, the nation is far more integrated into the world’s economic and political systems than when it was when it was an isolationist counterweight to the U.S. and its allies.

Russia, of course, maintains a permanent seat on United Nations Security Council. (It succeeded the former Soviet Union on the body in 1991.) Russia is also a member of the Group of Eight (G8) nations. It joined the G8 in 1998 and pledged economic cooperation with the other nations when it did.

Russia also has a stock market, which, despite past instability, has tied many in the nation to Western ways of investing. The Russian Trading System (RTS) was established in 1995, the same year the MICEX index started trading. The exchange added corporate and regional bonds in 1999 and money markets in 2004.

On the topic of investments, consider the Foreign direct investment (FDI) pouring into in Russia. Last year, it reached a record $94 billion, an 83 percent jump over 2012, according to a United Nations report. Russia now ranks third behind the U.S. and China as most attractive country for investors.

This includeS tech giants, which have made steep investments in Russia in the last decade. Although most have politely declined Russia’s invitation to establish manufacturing plants inside Russia, more than a few have established research and development centers there. In addition, most tech giants – think Microsoft, IBM, HP and Intel, just to name a few – have opened sales offices, which employ hundreds if not thousands of Russian nationals. They have also enlisted scores of business partners to help drive sales from St. Petersburg in the west to Vladivostok, which is only a mere few miles from the Sea of Japan, in the Far East.

In the past few years, Western tech giants have not only looked to Russia as a source for increased revenue, but also as a burgeoning market for new talent. Intel Capital, for example, has funded more than a dozen different startup ventures in Russia. In a blog published in December, Russian market watcher RuBase noted that, “The presence of new investment companies allowed the total number of deals and amount invested in IT to grow in 2013.” According to its data, there were 497 investments made in startups last year in Russia, worth a total of $1.1 billion.

On an even larger scale, several tech giants have pledged to support efforts to develop Skolkovo, a community on the edge of Moscow, into a technology hub that could one-day rival Silicon Valley.

In August 2013, the Skolkovo Foundation, which oversees the massive project, announced that it had secured agreements with state and private investors to funnel as much as $15 billion over the next seven years into Skolkovo, according to a report cited in The Moscow Times. Among other tech giants, Nokia, Siemens, Samsung and Cisco Systems have made commitments there. Cisco alone has pledged nearly $1 billion in investment over 10 years, despite ongoing charges of fraud and mismanagement associated with the project.

Unfortunately, corruption in Russia has been a difficult obstacle to work around for western tech companies. In September 2013, for example, three former HP managers were charged in Germany in a corruption investigation over improper payments made to win a $45 million sale of computers to Russia a decade ago, according to Bloomberg Businessweek. (A month before, news reports surfaced that a Microsoft business partner was thought to have provided kickbacks to a government official in exchange for a contract with a state-owned enterprise.)

Despite the malfeasance and high employee turnover, western companies continue to pour more money into the world’s largest nation because the potential for new business there and the quality of engineering talent available is so great.

That talent, by the way, has given rise to a number of organizations that are poised to challenge Western rivals — in Russia for now and outside the country perhaps one day. In Russia, for example, Google is the No. 2 search engine company behind Yandex. Likewise, VKontakte, Odnoklassniki and Moi Mir are the social media sites of choice for young Russians, not Facebook. And instead of Amazon or eBay, more Russians opt for home-grown e-commerce site Ozon, according to the BBC.

Among those already doing business outside the nation’s borders is Kaspersky, which has set up shop in the U.S. in Woburn, Mass. Today the company is one of the fastest growing purveyors of anti-malware technology. Last year alone, it recruited 800 new partners in North America.

Although the recent turmoil in Ukraine threatens the Moscow-based company’s ability to conduct business as usual, many believe Russian will stop short of scuttling the economic momentum is has worked so hard to acquire in recent years. On Monday, for example, the Russian stock market lost 11 percent of its value, prompting the Russian Central Bank to raise interest rates to stave off inflation.

In a blog posted Tuesday, Channelnomics CEO Larry Walsh opined, “Chances are, the way markets reacted shows the business community won’t allow diplomatic and military communities to prevail.”

For all our sake, let’s hope Walsh is correct.


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