Russia Ukraine Crisis Highlights Emerging Market Risks

Last week, Russian authorities in the southern Russian city of Lipetsk halted production at the Roshen chocolate factory.  Roshen is a leading confectioner in Russia and Ukraine, is controlled by the Ukrainian businessman Petro Poroshenko, who also happens to be a Ukrainian MP and a supporter of the pro-European factions in the Ukrainian uprising.   The dots join themselves.

A number of our clients are very keen to increase their exposure to emerging markets.  They like the growth it brings to the top line, hope that this growth can be translated to bottom line growth in due course and generally turn a blind eye to the negative cash profile that naturally comes with rapid growth.  The risks of operating in emerging markets are often referred to but are they really understood?

Strategically, I am all in favour of emerging market investment and have spent large parts of my career helping mature developed-market businesses establish emerging market presence through greenfield development or acquisition.  But Roshen’s experience is the kind of risk of operating in emerging markets that is often forgotten.

By way of example, I was working in a business in Ukraine a few years ago and the local mayor came into the offices unannounced.  The MD of the business met with him and afterwards I asked him what the meeting had been about.  “Oh, the mayor would like us to give some work experience to his daughter” I was told.  This didn’t seem too problematic to me, until I heard that the expectation was that in return for her work, the mayor would be given a significant slice of equity in the business.

In our less exciting developed economies, the food sector rarely offers up racy market growth levels, but there is a rule of law that we often take for granted.   It is probably not unheard of for someone to ask a CEO for a job for their daughter, but ownership of the business is not generally a part of the equation.  And whilst many of our markets might be mature, there are numerous examples where creative innovation and marketing can deliver the same level of growth as emerging markets,  with the added advantages of attractive margins and of being able to express your political views without the risk of the factory being closed down by the authorities.

I am all for investing in emerging markets.  I think the growth on offer cannot be ignored by businesses with multinational ambitions, however, the challenges and risks need to be understood.   This rush for “exotic” growth often ignores the growth available from smart investment in markets close to home and brands that have succeeded in rich domestic markets may have more to offer in similarly rich economies.