NEW YORK, Aug. 24, 2012 /PRNewswire/ -- Amid worsening economic situations in Western Europe and the US, international investment funds have turned their attention to former Soviet Union (FSU) countries, including Russia, Ukraine, and Georgia. Currency fluctuations and rising purchasing power in these countries make them an important destination for investors. (The average purchasing power in these countries has increased 90% since 2001, turning them into substantial and growing consumer markets.) However, investors should be wary of political risks associated with acquiring "post-Soviet" assets as they can affect investors' status in Russia and even in their home markets.
Renewed interest from investment groups in acquiring Salford Capital Partners, owner of IDS Borjomi, the famous naturally carbonated mineral water brand and number one export from Georgia, is due to the company's success in Ukraine and other Eastern-European countries except Russia, where Borjomi is banned.
However, acquiring Borjomi can create major political problems in Russia for potential buyers — Salford Capital Partners is owned by Boris A. Berezovsky, exiled businessman and vocal critic of Vladimir Putin's regime. Berezovsky controlled Borjomi and other post-Soviet assets, such as Aeroflot, AvtoVAZ (maker of Lada passenger cars) and Channel One TV, with his partner, late Badri Patarkatsishvili. Berezovsky was forced out of ownership of his Russia-based assets, but managed to retain control in Salford Capital Partners, incorporated in the U.K. and managed by a US national.
According to RUXX research, international funds TPG and CVCI are among potential acquirers of Salford. Both funds have presence in Russia: TPG has acquired major Russian retailer Lenta and was in talks for stake in VTB, Russian state-controlled bank with close ties to the Kremlin. Buying Borjomi and effectively financing Boris Berezovsky can undermine their ability to work in Russia, where good will of the Kremlin is a requirement.
Buying assets from Berezovsky also carries financial and litigation risks, as the Russian government and private investors around the world are after the businessman's properties. According to a poll of legal experts conducted by RUXX index, there is a real risk that "all deals that involve Mr. Berezovsky's assets can be challenged."
"So-called 'post-Soviet assets', i.e. brands that were famous in the Soviet Union and popular now, such as Aeroflot, Stolichnaya, and Borjomi, often carry a political stigma and investors should use extreme caution when they consider acquisitions," says Ilya Lushnikov, senior analyst for RUXX Index that tracks Russian stocks traded overseas. "All business is political in Russia, and it's important to weigh risks," adds Lushnikov.
Russian Industrial Leaders Index (RUXX) is an index that tracks Russian equities traded overseas.
SOURCE RUXX Index