In order for businesses to conduct foreign investments there are a few risk factors that can serve as barriers for investments. These risk factors could undermine growth and economic stability and they should be taken into consideration so that businesses would remain profitable and have sustainable market share in this competitive global era. Every business transactions have some level of risk. However, when business transaction takes place across global borders, additional risk is prevalent as oppose to domestic transactions. This section, examines the stability of both Brazil and Russia as it relates to the potential investment of Oil Industry. In order to compare and contrast both countries on its stability, considerations have to be given to the Political, Economic, Regulatory and Technological environment.
Compare and contrast Brazil and Russia political as it relates to political stability
Brazil has a Federal Government type meaning their political environment is made up of a number of self-governing states united by a federal government (Babylon translation, 2004), whereas, Russia on the other hand is made up of a Constitutional Federation. The issue here is whether government’s action could affect the profitability of investing in Brazil or Russia. Brazil is a stable government who is open to the idea of foreign investors. “It is the largest foreign direct investment recipient in Latin America, attracting an estimated USD 42 billion in 2008” (United Nations report). Although Brazil is considered as friendly or appropriate environment for investment, the government’s implementation of high level taxation and regulatory requirements exist. Brazil has a cooperate tax of 34% as compared to Russia 20% (Brazil income taxes 2010). As a result, conducting business in Brazil as compared to Russia with taxation as the variable makes Russia more of an attractive market since businesses in Russia will have more disposable earning for expansionary purposes of the oil industry. The level of corruption in a country has far reaching ramification on investments and on the doing business climate. According to Transparency International (2010) which gives corruption perception indices on a scale of 1-10 (1 being highly corrupt and 10 being free from corruption), Brazil has a corruption perception index of 3.5 whereas; Russia has a corruption perception index of 2.3. Hence, Russia highly probability of investors in the oil industry being subjected to unfair business practices than that of Brazil.
Compare and contrast Brazil and Russia as it relates to their Regulatory stability
According to Bloomberg’s report (2008), the Brazilian economy grow at the fastest paste since 2004 and in sync with standards and poor’s report the country is expected to maintain annual growth up to 4.5%. This type of economic growth gives credit to the country for potential investment. Thus, the previous year Brazil recorded a record high of $34.6 billion foreign investment. This amount of foreign direct investment together with a tripled export rate will cover Brazil’s current account deficit (Standard and Poor’s, 2008). Brazil stable economy have drawn investors and trade agreements between Brazil and other countries. Russia on the other hand, economy has been contracting due to falling oil prices and trade disputes with neighbors. This has resulted in Russia being the first G-8 nation to be downgraded since the start of the global economic crisis. Russia has been struggling with rising inflation, high unemployment, negative economic growth and social unrest which have become a disincentive for foreign direct investment including that of the oil industry (Walker and Robbins, 2009).
Compare and contrast Brazil and Russia as it relates to their Economic stability
As every other country Russia has regulatory system in place, however as a result of corruption, regulations are not enforced as to aid in the fear treatment of investors. The influence of governments on prices, bureaucratic inconsistency and other forms of government controls detours investments in various sectors. The regulatory environment in Russia makes it difficult to start, operate and close a business. Bureaucratic procedures are drawn out and complicated. For example, obtaining a business license takes more than 18 procedures and 218 days (The heritage foundation 2010). Investment law is very subjective to federal law which allows Government a lot of discretionary control over foreign investment. That is to say, while investment laws speculate the national treatment or foreign investors, federal law is given the prerogative in the protection of the constitution and defense of state. In retrospect, the Russian government in 2006 introduced what is known as the strategic sectors law under which interests by foreign investors must be pre-approved by the Russian government which has been marred by corruption (Russia been ranked 147 out of 149 countries on transparency international index or 2008 and bribery being rampant), inadequate infrastructure and unreliable contract enforcement. All of these factors affecting the oil industry in various ways. The court system however, in Brazil has proven to be highly ineffective. This is due to lack of human resource and efficient functionary equipment, especially when dealing with issues pertaining to shareholder rights and claims. This comparison shows that both markets have varying weaknesses as it relates to regulatory systems. However, specific to oil industry, Brazil has a comparative advantage in that, the country has had regulatory stability for over 10 years of petroleum Law (Hale, 2009).
In addition to these, other factors influences the attractiveness of the market relative to the potential oil industry. Provided hereunder is the convertibility of currency which is another deeming factor that can influence investment opportunities in Brazil or Russia.
Convertibility of Local Currency to Dollars
The convertibility of a country’s local currency also plays an important role in further development of an economy. With the U.S dollar being the world reserve currency, developing countries would do well to have a close, if not full convertibility rate to the U.S dollar. In Brazil the currency used is the Brazilian Real (R$), also known as BRL. At present the exchange rate for Brazilian currency to the U.S dollar is 1.82 BRL to $1 U.S.D. Though not fully convertible, the Brazilian Real stands strong. Ever since 2003, the U.S dollar has fallen 50% against the BRL. The reason for the strength in the Brazilian Real is the fact that Brazil’s exports surpass its imports. Thus more foreign currency comes in, than the BRL goes out. This can affect the Brazilian currency positively as a convertible currency would mean free movement of capital, which can help strengthen the economy. Oil is in great demand all over for it has a vast number of uses. If the oil industry were to come to Brazil it will yield much higher profits due to its close conversion rate to the US dollar of 1.82 BRL to $1 U.S.D as mentioned earlier. As of 2009, Brazil had the second largest oil reserves in the region of South America, of 12.6 billion barrels as was proven by The Oil and Gas Journal (OGJ). 2.4 billion barrels of oil was produced in Brazil each day and continued to rise throughout the years. With increases such as these, the Short-Term Energy Outlook forecasted as of September 2009, that oil production would reach around 2.61 million and 2.81 million in 2010. Brazil, in this respect clearly has high potential where the oil industry is concerned and would prove to be a profitable area for investors wishing to position their industry in the country. However, investors must still be cautious. Although Brazil is high on foreign exchange, in order to sustain this level of foreign currency coming into the country, and to deter inflation of their currency, trade barriers are and the high tariffs are place on some goods to prevent or minimize imports. Taxes are also very high and are placed on all citizens in the country to cover government spending. So at the end of the day a heavy amount of a business’s profits would go towards paying taxes. So while an oil industry may work well in Brazil, there are other areas of concern that investors must take into consideration before selecting the country as a target market.
Russia on the other hand has achieved full convertibility of its currency since the year 2006. Russia’s currency uses the ruble or RUB. At present, its rate to the US is 1 RUB to 0.03 US dollars. This therefore opens Russia’s economy to freer movement of trade and a major player in international financial markets (Encyclopedia.com, 2006). A fully convertible currency has gained Russia multiple benefits such as the opening of ruble accounts for both foreign and local investors alike and the advantage of investing in both foreign and domestic businesses. Russia is quickly becoming a globally established economy. However, there remain few problems with the Russian currency. According to The Worlds Favourite Currency Site,() “Russian’s inflation rate, compared to the US Dollar, is near 6.5 percent, while the ruble has weakened to 33 rubles per US dollar”. Russia, as the largest oil producer on the globe, can suffer greatly from fluctuations. This is because as prices rise and fall, so must the prices of oil change to reflect. This as a result, hinders the ability for the country to plan a proper budget for its economy and consequently, the ability to plan for expansionary purposes for the economy as a whole.
From carefully analyzing both Brazil and Russia in retrospect to the potential oil industry, Russia seems to be a more appropriate country for the investment of oil. Though both countries have its advantages and disadvantages, in relation to currency convertibility,