April 27th, 2011

Russia’s investment climate cools while Sino-Russian pipeline dispute heats up


HSBC is the latest foreign bank to pull out of Russia. Less than two years ago, HSBC targeted $200 million towards its Russian retail expansion only to have it close, following fellow Anglo bank Barclays that removed its retail banking presence from Russia in February. According to HSBC’s statement by Russia Chief Executive Officer Huseyin Ozkaya,

it’s clear that the strongest opportunity for HSBC in Russia lies in servicing corporate and institutional clients.

But it’s far from clear that Russia is a good place for institutional clients. In a recent Emerging Markets Private Equity Association study, Russia’s attractiveness for private equity deals was ranked lower than the other BRIC countries, Brazil, China and India and even lower than the Middle East and African countries. Carlyle co-founder David Rubenstein said in Berlin last month,

Russia has not proven to be a place where Western private-equity investors can have the returns and realize the profits commensurate with the risks they’ve had to take.

This is reflected in the amount of private equity investment dollars that flow to Russia. Over the last three years, Russia received $1.4 billion in private equity investment, but that pales to the amounts that China ($28.6 billion), India ($15 billion) and Brazil ($5 billion) received.

China’s economic clout is also seen in other ways in its interactions with Russia. Transneft, the Russian pipeline company has accused China National Petroleum Company (CNPC) of violating the contract that established the Russia-China Crude Pipeline. The contract indicated that China would pay market prices for the oil, but now they are seeking an adjustment on the price as well as double the amount of oil as previously agreed upon. Despite Transneft spokesman Igor Dyomin’s recent comments about China’s lower price demand, Chinese Foreign Ministry spokesman Hong Lei insists all is going well with the pipeline. Only time will tell which side will prevail.

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