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The dissemination of the former Soviet Union represents an area of the world that has
undergone massive economic change in the past decade. Russia is the world’s largest
country according to land mass and is well-endowed with natural resources, including oil
and gas, making it a Eastern European marketplace that should be considered by potential
investors. Indeed, Russian GDP in U.S. dollars rose ninefold, from $196 billion in 1999 to
$1.75 trillion by 2008, making it the eight largest economy. Through privatization,
Russia’s political and economic framework is changing. Privatization presents an
opportunity for contrarians to invest in discounted companies and generate high returns as
corruption and a lack of transparency deter most investors. For instance, Hermitage Fund
became the largest and most successful investment fund specializing in Russian stocks
with $4 billion under management through equity portfolio investment in Russia. In its
early stages, Hermitage Fund experienced strong financial performance; however, the
hedge fund had to liquidate all its Russian assets because its unique investing strategy,
shareholder activism, conflicted with the goals of politically connected oligarchs. This
elaborate scam suggested a sophisticated and corrupt relationship between a number of
government officials and private individuals. Was Browder’s move to enter the Russian
market, indeed, an imprudent one as outsiders believed? Should investors seeking high
returns consider entering the Russian market? The following analysis will focus on
Hermitage’s Russian Quandary case to highlight the challenges that the company had to
overcome in expending its operations in a highly corrupt market.
Russia as an Emerging Market
The marketplace of Russia is one that shows, on one side, many appealing characteristics
to potential investors, as it is the world’s largest country by land mass with the sixth largest
population. The country’s abundant natural resources are one of its profitable assets. The
rise of natural gas prices from $28 in 2000 to $110 in 2007 has benefited Russia since it is
the largest exporter (Exhibit 6). In addition, Russian GDP has increased at an annual rate
of 6.4% per year since 2000 (Exhibit 5). Under the governance of Vladimir Putin, the
taxation system within Russia has undergone significant modifications. The business
landscape has become more attractive due to the decrease in corporate and income tax
rates (Exhibit 8). To improve the allocation of resources and eliminate oligopolistic
industries, Putin has encouraged privatization. On the other hand, Russia’s legal system is
bureaucratic civil law. Taking its root from a formal communist system, Russia may not
