In Russia, opportunity still beckons - and so do the pitfalls

Vladimir Putin has a point when he says Canada is missing out on vast trade and investment opportunities in Russia.

But it's a far more complex picture than Russia's newly returned President suggests.

The country's de facto ruler since 2000 – president until 2008, Prime Minister since then, and soon to return as President after an election victory over the weekend – told The Globe and Mail in an interview in Moscow last week that he is concerned about how little trade there is between Canada and Russia, given the two countries' similarities. Each country has vast stores of oil and gas, large agriculture sectors, and large mineral reserves, such as potash.

Two-way trade totalled just $2.8-billion last year – roughly half of what Canada did with Brazil and a quarter of trade with relatively tiny Hungary. Investment is also light: Canadian direct investment in Russia totalled less than $600-million in 2010, up 12 per cent from 2009.

But there's a reason for that. For all its promise, Russia remains an exceedingly tough place for Canadians to do business – its potential undermined by distance, taxes, corruption, red tape and unpredictable investment rules, particularly in mining.

Toronto gold miner Alhambra Resources Ltd., for example, has found success in neighbouring Kazakhstan, but deliberately shuns Russia.

"Russia is too difficult. We wouldn't go there," said Ihor Wasylkiw, the company's chief information officer, citing high taxes and regulation.

"Do you want to invest a billion dollars in a country where they can come to you one morning and say, Good morning, we're taking over your company?"

Last month, Barrick Gold Corp. said it is pulling out of Russia altogether by selling its 20-per-cent stake in Highland Gold Mining Ltd. – a move analysts suggested was due the difficulties of operating there. Many other companies are waiting for investment rules to be relaxed, as Russia has pledged to do.

And yet several prominent Canadian companies are thriving in Russia – in mining and other sectors – including Magna International Inc., Bombardier Inc., SNC-Lavalin Group Inc. and Kinross Gold Corp. Beyond mining, the Canadian government has identified other key prospects in oil and gas services, food, agricultural equipment and building products.

There's a case to be made that the business opportunity is growing. Russia formally joined the World Trade Organization last year, which is partly symbolic, but also provides new protections for trading partners. Mr. Putin has also vowed to move on privatizing key state assets. And at long last, the consumer market is expanding rapidly, opening up potential markets for many of the things Canada produces, including jets, telecom equipment and building products.

For now, mining remains Canada's top focus. Kinross has poured $2-billion into Russia since 2007, making it the largest Canadian investor there and single largest foreign investor in mining.

"We're not saying everything is hunky-dory, but our success can and should be replicated," argued Lou Naumovski, director of Kinross's Moscow office.

Kinross went in early when the rules were less friendly than they are today, "paid its dues" and forged strong relationships with Russian politicians and local leaders, he said.

"For all the horror stories that the press likes to harp on, there is so much good news about investment in Russia," Mr. Naumovski argued.

Experts acknowledge the restrictive regulations in mining are a barrier to investment. The Russian government, for example, deems certain resources strategic, including gold and uranium, reserving the right to exploit them itself. So if a foreign company finds gold while mining for copper, the Russian government could put up substantial roadblocks, or take over the project.

"In mining, the Russians need to make some critical changes to the legal framework before there will be large-scale investment," said Nathan Hunt, chairman of the Canada Eurasia Russia Business Association, who works in Moscow as an agent for various foreign companies.

But Mr. Hunt said Canadian companies may be missing out by not building ties while many of their rivals in Europe and Asia are developing vital personal relationships.

"Russia is a tough place to do business, but a great place to make money," he added. "Countries that take a leap of faith and invest in the relationship invariably reap rewards."

As in most other countries, investment in Russia is well down from the peaks reached before the 2008 recession. Total foreign direct investment, or FDI, in Russia increased 23 per cent to $50.8-billion (U.S.) in 2011, but that's a steep drop from the $75-billion it attracted in 2008.

The potential for much more is there, given that Canada and Russia are the world's 10th- and 11th-largest economies, respectively. Ottawa recently said in its 2011 State of Trade report that rapid forecast economic growth would vault Russia from an insignificant trading partner for Canada to No. 18 by 2040.

Part of the blame for the squandered opportunity also lies with the Harper government, argued Piotr Dutkiewicz, a Russia expert and professor at Carleton University. He said Ottawa lacks a strategic plan for Russia and has been slow to arrange visits by the Prime Minister and other top ministers in a country where personal contact is vital. (Mr. Harper is to visit Russia in September for the Asia Pacific Economic Cooperation summit in Vladivostok.)

"The Canadian government does not know what they want from Russia," Prof. Dutkiewicz said. "We have a strategy toward China and Latin America, not Russia. We're missing this completely."