Pestel Analysis Russian Federation free essay sample

This part of the dissertation will analyze main political, economic, social, technological, environmental and legal issues within the Russian Federation. All of the Interviewees outlined the political aspect as the most important when investing into Russia, however the Author would like to acknowledge that the economical and legal factors have a critical weight in the issues of FDI, therefore their analysis will play a comprehensive role in the thesis, assuming that the initial reader has no background knowledge of the environment. Low awareness of ecological issues (global warming, recycling) ? Nuclear waste deposits in Siberia ?History of environmental accidents – Chernobyl ?Harsh climate conditions ?Vast territory is hard to manage Coastal access is vast but strategically more costlyLegal ?The legal system is new ?Bodies of conflicting and intertwining laws ?Federal government system makes the legal co-ordination complicated ? Poor human rights (e. g. freedom of speech) ?Corruption affects law enforcement Political Through historical analysis (please refer to Appendix A), it is evident that authoritative rule has played an important part in Russian political culture, irrespective of the government type. We will write a custom essay sample on Pestel Analysis Russian Federation or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The democracy is relatively young, but the system has been stable for a long period of time to ensure economic progress (i. . there have not been any radical changes in government structure since 1991. The elections were conducted according to international standards and without any major complaints from the International Supervisors. There are internal problems with terrorism in the South Caucasus region and small military conflicts in the region (Chechnya, South Ossetia) have been unpopular with the EU and USA and are still causing tension in the geopolitical arena. Internally the corporatism does not ensure a fair business environment to everyone. Structurally speaking, ‘the decisions are not made on business; they are made on other things†¦Ã¢â‚¬â„¢Ã¢â‚¬ ¦Ã¢â‚¬â„¢it’s more about who’s got a bigger pistol. ’ (Question no. 12, Deputy CEO, 2010). Since most academics tend to associate Russian democracy with oligarchy, such favouritism can be seen to diminish the business environment within Russia, as there is no basis for fair competition. The Deputy CEO outlined that in Russia it is extremely important to know who is ‘boss’, this can be seen as a side effect from the historically prominent forms of leadership. Comparatively, fellow members of the Commonwealth of Independent States (CIS) (former Soviet Republics such as Kazakhstan, Azerbaijan and Turkmenistan) that are also command economies where the hierarchy is clear, are progressing much faster in national and international stages (Question no. 12, Deputy CEO, 2010). The relationship with Europe is unclear. Europe is the largest destination of Russian exports. Despite the mutual dependence; there is still enough a lot of diplomatic conflict between both parties, predominately due to international balance of power (European Union is a close ally of the United States). According to the Deputy CEO (Question no. 20, 2010), there international opinion of Russia is that it uses energy as a ‘political instrument’. President Medvedev is seen to be keen on a much more open environment. Russia has currently been attempting to diversify its exports to Asia and has close links with China, which is recognized internationally as a potentially leading economy in the future (Anker Aronsen, 2010). Corruption index in Russia is one of the highest in the world. According to the Transparency International’s Corruption Perceptions Index (2009) Russia ranks 147th out of 179 countries. Corruption levels are comparable to Niger and the Democratic Republic of Congo, considering the economic power of the Russian Federation (7th in the world in terms of Purchasing Power Parity), the amount and size of bribes is soaring, despite government’s policies on anti-corruption (new legislation requires government officials to register their income) (Index of Economic Freedom, 2010). Risk Exposure: The political analysis leaves foreign investors subject to cultural and systematic legal risks as the corruption makes administration process longer. Economic When making a decision to make a Direct Investment into a country economic analysis is crucial as the economy of the country is a foundation for all aspects of the business environment. The analysis will focus the key areas of the Russian economy: the Gross Domestic Product (GDP), Inflation, Exchange Rate and Debt. The factors will be compared internationally acceptable standards of the United States of America. Gross Domestic Product: Alan C. Shapiro (Multinational Financial Management, 2010) states that the lasting levels of FDI have a direct impact on GDP, the evaluation of the degree to which political factors (such as corruption) have had an inverse effect on the levels of FDI as clearly seen within the Russian economy. The Gross Domestic Product of the Russian Federation is split into the following sectors: Chart 2 Overall since Putin’s presidency has seen a stabilized trend in economic development through the increase in energy prices, nevertheless the dependence on energy exports is proving to have a negative impact on future economic progress. Majority of the revenues come from the export of natural resources, which according to Abelsky account for about 70% of the GDP (‘Russia Sees Oil’, Bloomberg, 2010). Table 4 GDP Growth Rate in % GDP Growth20052006200720082009 GDP growth USA3. 12. 71. 90-2. 6 GDP growth Russia6. 48. 28. 55. 6-7. 9 The issue of dependency on oil and gas exports questions the sustainability in the development of economic indicators overall (Havlik, 2010). The correlation between GDP and energy prices (Table 10) can be clearly verified through the years 2008-2009, when the global credit crisis lowered the demand for oil (and the price fell by $35. /barrel) and Russian GDP contracted by 7. 9%. Even though the government responded quite quickly to the crisis, by supporting the currency and the financial system, international ratings agencies remained sceptical and have recently down graded their outlook from ‘positive’ to ‘neutral’ (‘Russia Sees Oil’, Abe lsky, Bloomberg, 2010). Risk Exposure: The correlation between the oil price and GDP revenue gives rise to location risk as Russia is subject to spillover effects from other countries. Table 5 Inflation Rate in % Inflation Rate20052006200720082009 Inflation USA %3. 393. 242. 853. 85-0. 34 Inflation rate11. 512. 79. 8914. 1 Inflation Rate: Russia has been experiencing persistent double digit inflation. High inflation is known to decrease the Purchasing Power Parity of a country (Zhou, 1997), this is important to the Russian government as its geopolitical power is largely linked to the indicator. When investigating the source of this historically persistent problem, naturally the first aspect the Author analyzed was the increase in money supply (see Appendix E). However, despite the fact that there was relatively little (1. 7%) increase in 2007, inflation still remained close to 10%. Through further research, according to the Keynesian view (Trevithick, 1975), characteristics of the built-in inflation can be found in Russia, in which people have a consistent expectation that inflation will remain high and therefore increase the prices of their products and demand for higher wages. The problem is instigated by corruption, under which government is ineffective or reluctant to control fair estimation of prices, i. . prices continue to increase regardless of economic conditions. This can be easily illustrated by the recent financial crisis and the price of oil. According to The Russian Federal Anti-Monopoly Service, in respect to the decline in price by almost $36, the petrol prices in Russia rose by 30-60% (‘Russian Anti-Monopoly Probes’, RT, 2009). Exposure to Risk: The high inflation rate shows that the economy as a whole is slow ing down and that the investment climate might be unhealthy. This can be categorized as general economic risk. Exchange Rate: The Russian Rouble is a volatile currency (the coefficient of variation Russian Rouble standard deviation is 9. 8% compared to the standard deviation of 5. 8% for dollar as both were evaluated against the Euro); although it is termed as ‘free-floating’, in fact it is monitored and controlled by the Central Bank of Russia. In respect to the energy prices it is sometimes comically referred to by analysts as an ‘oil derivative’ (Clover, 2010). Table 6 Foreign Exchange Rates Average for Euro, Rouble and US Dollar FX Rate Mean20052006200720082009Standard Deviation RUB/EUR35. 2634. 1135. 0136. 4344. 143. 651 RUB/USD28. 327. 225. 624. 931. 75. 646 USD/EUR1. 3011. 2541. 3711. 4881. 3930. 080 Russia has the fourth highest number of Foreign Exchange reserves; this is largely needed for the currency manipulations in order to decrease the volatility of the Rouble. Given the strength of Russia’s balance of payments until the Credit Crisis (2008), taut management of the nominal exchange rate resulted in considerable interventions which were only partially sterilized (‘Towards a Flexible Exchange Rate Policy, OECD, 2009). As a result, inflation jumped from 9% to 14%. Large amounts of foreign reserves demonstrates that Russia has sufficient means of dealing with the imbalances in the economy and it can protect the Rouble against speculative attack and volatile energy prices; however it also exposes the weakness of its monetary system in the failure to sterilize the results of the interventions which intensify the incessant inflation predicament. Exposure to Risk: Internationally all investments are subject to exchange rate risk. As Rouble is considered to be a volatile currency, the exchange rate risk is also higher, however it can be managed easily through hedging. Public Debt: Since the credit crisis internationally the importance of public debt management has been acknowledged (‘Principles of Managing Public Debt’, IMF, 2010). Up to 2008, a decreasing trend could be seen in the level of Public Debt and even despite the small increase in 2009, Russia is ranked 122nd out of 126 countries in 2009 (‘Country Comparison: Public Debt’, CIA Factbook, 2009). Table 7 Total Public Debt as % of GDP Total public debt20052006200720082009 Russia16. 410. 18. 25. 69 USA37. 537. 136. 940. 854. 6 Despite these figures External Debt (total private and public debt owed to non-residents) is high due to high real exchange rate of the Rouble (Russia is ranked 20th out of 198 countries(‘Country Comparison: External Debt’, CIA Factbook, 2009). In comparison to the US, which has the highest debt levels of any country in the worlds, a relatively healthy approach to public debt can qualitatively be traced to Russian culture. The ‘credit lifestyle’ in Russia is not as popular as in Europe and the US. Debt in Russian culture is a very powerful negative connotation which is easily illustrated by a famous Russian proverb – â€Å"If you don’t have it, don’t spend it† (MacDonald Gastmann, p. 274, 2004). This is can be proven by the historical approach to the debt inherited from the U. S. S. R. , Putin’s government repaid the remainder of debt to the London Club in 2010 (‘Russia Pays off Creditor’, RIA Novosti, 2010). Summary: This kind of political restriction in uncommon, for example the US continues to increase its debts, both public and external (‘US Public Debt Hits Tipping Point’, Pozen, The Boston Globe, 2010), which through its recent ardent exposure in global media has been causing derision in the American society, manifested in the Barack Obama’s mid-term government elections in 2010 (‘Republican Tsunami’, Leonard Gardner, Daily Telegraph, 2010). Exposure to Risk: As Russia has comparatively low levels of Public Debt investors are not exposed to risk as such, however current economic regression brought on by the financial crisis may lead the public debt levels to rise. Social The society is very diverse which poses a lot of tribulations not only politically, but also economically. The society is very well educated (literacy rate is one of the highest in the world) and the size of the population is the largest in the geographic parameters of the European continent, however the conditions and the level of life is despicable if compared to countries in the European Economic Area. Around 16% of the population lives below the poverty line. The GINI index (measures the degree of inequality in the distribution of family income in a country (‘Country Comparison’, CIA Factbook, 2010). The GINI Index value of 100 expresses maximal inequality (one person has all the income) and a value of 0 (expresses that everyone has the same income) (UN Legislative Council Secretariat, 2005). In the years 2004-2009 GINI index has been around 40%, which suggests that income distribution is uneven and although the situation is better than in America (see table 8 below), compared to European ountries like Sweden (GINI average of around 24) there are development benchmarks to adhere to. Table 8 GINI Index of Income Distribution GINI Index20052006200720082009 Russia40. 54141. 342. 341. 5 USA46. 94746. 346. 746. 8 In respect to the GDP per capita (just below 6000$) it is evident that the internal market is not as attractive as other economic figures say. Per se Russia is no thing more than a ‘rich country of poor people’ (Putin, Sakwa p. 76, 2008). In the interview conducted by the Author, Deputy CEO (Question 11, 2010) outlined sharp class divisions in Russia which although were not mentioned directly signified strong culture shock. In respect to the demographics poor health support, issues with alcohol, high abortion rate, emigration and etc, all contribute to the decrease in population and low life expectancy for men (who make up a larger proportion of the economically active population)(Political Risk Services, 2009). The oligarchic environment supported by corruption and oppression of minority groups (Chechens and so on) within the Federation, uneven income distribution and average GDP per capita increase the possibility of conflict (please refer to section (2. 1. 2) Social Aspects). Unstable conditions are easily illustrated by the re-birth of National Socialism and it’s slogans of ‘Russia for Russians! ’(Von Hoffmeister, 2005). Exposure to Risk: The turbulent social factors and uneven income distribution may potentially lead to conflict within the country. Such diversity in ‘social fabric’ also produces operational risks as culture between regions differs greatly and can be classified as political risk Technological In order to maintain military supremacy, the Soviet government invested heavily into the military, science and space. Due to the fact that education in Soviet Union and subsequently in Russia is free, the importance of using technological progress as a means of development and protection was and still is of great importance. Number of scientific and technological graduates in Russia has always been high. Currently Russia is producing 200,000 science and technology graduates per year (just as much as India and it has a considerably larger population) (‘From Russia with Technology? ’, Bloomberg, 2006). Military spending increased from 19. 7 bln USD to 50 bln USD by 2009, a large proportion of which is going to the research and development of new technology (Global Securities, 2010). With the dissolution of USSR, the low wages and poor societal conditions led for the ‘best minds’ to move abroad. This, as well as declining governmental investment into sciences, contributed to a decrease in technological competency, especially in the regions outside the federal cities. Recent attempts of the Russian government to attract back scientist that have once left Russia (‘Russia wants its brains back! ’, RBTH, 2009) signify that it is pursuing policies of scientific development and wants to support technology further. According to Alexander Allakhverdyan (2009), most talented individuals prefer to graduate with economics or business degrees, because the prospects for employment are better. Based on the PwC report (2. 5), Russia needs to become a ‘technology power house’ in order to ensure economic progress. Although the government has been addressing this issue the main problem that exists is the underdeveloped communications systems outside of federal cities, investment in which is costly due to the vast geographic span of the country. Exposure to Risk: The technological capacity of the country and academic aptitude of the Russian population towards technology could potentially make it easier for foreign investors who are engaged in highly technological businesses to transfer their operations to Russia. However, the issues of knowledge transfer arise as the legal system is not developed enough to ensure full protection of intellectual property rights. Environmental (For more information on Geographic conditions please refer to Appendix C). The abundance in natural resources has been more of a curse than a blessing for Russia. It is this abundance that is largely unappreciated by the population. Compare to Europe, there are no trends towards the development of environmentally friendly fuels or alternative energy sources. In the future gaps in development between Europe and Russia can lead to legal conflicts as the approach to the environment is different (Boldyrev, 2009). The vast geographical span of the country and harsh climate conditions have always been a feature of Russian life. The territory is also hard to manage, military wise. The coastal access is not favourable and transportation is costly. Despite that, the amount of arable land is only sufficient to satisfy domestic consumption (Dyomkin, 2009). Corruption has been a danger to the environment – large numbers of animals are hunted and fished illegally disturbing the ecosystem. In the future there is a chance that with climate change and deteriorating ecological environment will cause environmental catastrophes. The current ecological debates in the Russian Duma (parliament) may lead to a conflict between Medvedev and Putin; however they also signify a growing awareness for the ecological issues. According to the Deputy CEO (Question 12, 2010) the government closely monitors environmental issues that are industry related. Previously ecological factors have been used as a tool for political manipulation. Exposure to Risk: As the environment is a sensitive issue within can potentially give grounds for conflict. If the investor is operating in different parts of the Russian Federation, the operational and logistics costs can be high due to the geographic span and poor infrastructure. Legal It is understandable that the Russian judiciary system is not as developed compared to the European or American system because the democracy is young. The Deputy CEO (Question 8, 2010) outlined that most issues within Russia are manageable, apart from the quality of the legal system, as the Russian leadership style means that nobody takes into consideration documents that were signed by predecessors. Federative form of government makes the legal communication more complicated as different regions sometimes have conflicting laws. Effectively, between 84 different administrative units, the management and cooperation of the judiciary is principal and ineffective. An inherent problem seems to have socio-cultural roots as most of the judges have been employed during the Soviet era. Low GDP per capita and uneven income distribution affects government employees (teachers, doctors, military and judiciary) (Survey of the Employment of Population, ROSSTAT, 2009) the hardest and entices corruption through bribes. Corruption ensures that the legal instruments are not functioning properly and are unjust. Furthermore, Russia has a poor record of human rights (consult Appendix D for further details) and the Press is considerably monitored, compared to the Western Countries, yet it is still an improvement from the Soviet Era. The overall legal environment is weak, corrupted and ineffective (Index of Economic Freedom, 2010). Exposure to Risk: Due to the fact that the Russian government cannot provide a strong enough grounds for enforcement of law, the legal system can be risky for foreign investors as they do not have an opportunity to defend themselves within Russia and may be forced to act through international courts.