Emerging Markets: A New Frontier

Like most big western companies, the British home-electronics retailer Dixons Group has closely tracked the rise of Russia's consumer market over the past few years, agonizing over when and how to jump in. In April the company finally took the plunge, announcing a $1.9 billion deal to acquire Eldorado, Russia's leading specialist retailer of consumer electronics and domestic appliances, with more than 600 stores. But Dixons is still nervous about the Russian investment climate, and its worries haven't been helped by recent problems at high-profile Western firms, including BP. So the firm has made an arrangement in which it won't have to start paying for Eldorado for at least two years. In essence, Dixons has given itself a trial period to determine whether it really wants to be in Russia. "It's a no-risk option," says Dixons spokesman Hamish Thompson.

Few executives would describe Russia as "no risk," and the mixture of apprehension and opportunism with which Dixons is entering the market perfectly captures the feelings of Western investors about the country's business climate. The Russian economy is powering ahead, propelled by the high price of oil, Russia's key export. Growth exceeded 7% in each of the past two years and is expected to be about 5.5% this year, more than triple the euro-zone average. Many Russians are still poor and live in wretched conditions, but on the whole, household income is up, and especially in big cities like Moscow and St. Petersburg, people are ready to splurge. The spending boom is creating a merger wave in sectors as varied as banking, brewing and confectionery. Alongside the Dixons deal, the huge Belgian beer company InBev is finalizing the last pieces of a $730 million acquisition of Russian beer giant Sun Interbrew, and Coca-Cola recently agreed to buy Multon, Russia's second largest juice company, for an estimated $600 million. Excluding the energy sector, mergers and acquisitions of Russian firms soared to more than $8 billion last year from $4.8 billion in 2003, according to Thomson Financial. Yet even as Western firms rush to buy Russian, at the back of everyone's mind is the nagging question, Just how big is the risk, and is it really worth taking?

Since President Vladimir Putin came to power, the Russian economy has staged a dramatic comeback after its near collapse in 1998. But along with red tape and corruption, companies face government meddling, primarily in the form of a highly unpredictable tax-enforcement policy. The most battered victim is Yukos, the former Russian oil giant that is in its death throes after being hit with multibillion-dollar back-tax claims that its erstwhile owners say were part of a Kremlin campaign against them. A Moscow court last month sentenced Mikhail Khodorkovsky, the former Yukos chief executive and a major shareholder, to nine years in jail on charges of tax evasion and fraud.