Political Risk Insurance and the future outlook of the Russian market
Daniel Wagner, CEO of cross-border risk consultancy Country Risk Solutions (www.countryrisksolutions.com) and author of the new book Managing Country Risk (www.managingcountryrisk.com), has a quarter century of experience analyzing country risk, including 15 years of underwriting experience with AIG, the Asian Development Bank, GE, and the World Bank Group. He recently spoke to ModernRussia.com about the Russian market, looking at the progress made and future outlook from the perspective of those underwriting political risk insurance for foreign investors.
From the perspective of political risk insurance (PRI), how do you believe the assessment of Russia has changed over recent years?
Russia has been a top destination for PRI for many years and that has not changed over the course of the past decade. The reason does not have to do with any concern about political stability per se, but rather the demonstrated propensity of the Russian government to expropriate foreign assets in the natural resource sector.
That said, it is also fair to say that over the past decade Russia has clearly demonstrated that its government and its economy are stable. However, its over-dependence on oil and gas as a source of state revenue puts it at risk in the event of a sustained drop in the price of global oil and gas. Russia needs the price of oil to stay well above $100 per barrel in order to balance its budget, and for president-elect Putin to be able to deliver on the promises he made during the presidential campaign.
What are the key issues that underwriters in this sector are monitoring when it comes to Russia, and the trends that are being observed?
Underwriters are naturally sensitive to insuring investments in the natural resource, and particularly oil and gas (O&G) sector. That said, a foreign investor's history in the country, its joint venture partner, and the nature of its operating agreements with the government can provide some comfort to underwriters. They key issues are the length of history operating in the country, nature of operational freedom, quality/track record of the joint venture partners, presence of international arbitration in operating contracts, and bilateral investment agreements between the home and host countries.
How do you believe Russia compares to other key emerging markets in this regard?
It is generally not productive to try to compare one country against another because each transaction has a unique risk profile, which will govern how underwriters perceive it and how insurable it therefore becomes. There are good transactions in otherwise 'risky' countries, and vice versa - and there is no country that does not have perceived political risk.
What has been the PRI view toward the recent election period, and the impact on the investment climate?
I have not canvassed other underwriters on this subject per se, but can safely say that Mr. Putin's re-election is perceived as a stabilizing factor. Underwriters will undoubtedly presume that Mr. Putin has learned some valuable lessons as a result of the investment disputes that arose during his previous tenure, and the realization that Russia must have foreign investment in order to operate and upgrade its infrastructure. On this basis, it can be presumed that underwriters will take a 'wait and see' approach to underwriting future transactions in Russia.
On the whole, investors are considered to have reacted positively to Vladimir Putin’s election as president. What do you believe are the reasons for this?
I believe that most people expected Mr. Putin to be re-elected, and that it was a forgone conclusion that this would be the case. In that regard, I think investors have largely reacted positively because they have a good idea of what to expect in the future. And, as stated, above, their presumption will undoubtedly be that Mr. Putin will not make some of the mistakes he made in the past with respect to foreign direct investment in Russia.
From an underwriter’s perspective, what would be your outlook for Russia for the coming twelve months? What would you be advising clients with existing or potential investments in the country?
I expect Russia to continue to benefit from the global economic recovery, and that its middle class will also continue to grow. It has had one of the best performing stock markets in the world and expectations are high that it will continue to live up to its billing as a BRICS country. That said, I would advise clients to adopt a wait and see approach to future investment in the country, and to proceed with caution, particularly in the natural resource sector.