Assignment 2

‘’Choosing of a country to invest in’’

Submitted to;
Dr. Hafiz Muhammad Waqar
Submitted by;
Muhammad Umer Sadiq (9212072)
Muhammad Talha Nawaz (9212073)
Muhammad Owais Afzal (2212041)
Zahra Khan (9212089)
Subject: International Business
Program: BBA(Hons.)7th-A [Evening]

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Task: You are the CEO of a company that has to choose between making a hundred million investment
in Russia or Poland. Both investments promise the same long run return so your choice is driven by risks
consideration. Assess the various risks of doing business in each of these nation. Which investment you
would have favor and why?

Answer: Before Choosing the one specific country to invest in between Russia and Poland, first we will
go through the analysis of different Issues that can affect the business activities of a foreign investor and
will analyze what problems and risks are associated in both of these states for international companies.

Issues associated with investing in Russia:

1.Tax rates and fiscal policy:
The World Bank Enterprise Survey indicated that out of 15 areas of the Russian domestic business
environment the tax rates and fiscal policy are the biggest obstacles to its business operations, followed
by access to finance/credit and corruption. Russian firms complained about the tax code complexity and
the unpredictability of the implementation of tariffs and fees. The major tax motivation in the attractive
economic branches is still missing. The Russian economy is over-administrated and Russian companies
are expected to give gifts in their meetings with tax and other public officials for “getting things done
quickly”. This happens in the case of government contracts, operating and import licenses, and
construction permits. Transparency International ranked Russia 136 out of 175countries in its
Transparency International Corruption Perception Index in 2014.

2.Dominance of state owned companies:

The other key problem in the Russian economy is that it is based on a small number of large and super
large enterprises in which the state holds a major share. The state-owned enterprises dominate above
all the strategic sectors, such as energy, transport and banking, and account for about half of GDP. They
enjoy privileged access to the state financial sources and benefits. The dominant position of the state
companies impedes market entry for other non-state enterprises. This hinders internal competition on
the market. As the OECD Economic Surveys2009 indicated “there is pervasive blurring of the line
between the public and private sectors, arising not only from the extensive role of state-owned
enterprises but also by close ties between government (at all levels) and major private firms “.

3.Intimate Business-Political Ties:

In Russia, businesses and politicians often have very close relationships, which leads to a system where
certain businesses, especially those run by wealthy and influential people, get special treatment from
the government. These business leaders, known as oligarchs, have a lot of power over the country's
economy and political decisions. This makes it hard for other companies, especially foreign ones, to
compete fairly because they don’t have the same connections.

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4.Weak Property Rights:
In Russia, businesses and individuals don’t always have strong legal protection over what they own. This
makes it easier for the government or powerful people to take away property or assets, sometimes
without proper legal processes.

5.Lack of transparency:
Lack of transparency means that the rules for doing business, government decisions, and how things are
managed aren’t always clear or open. This makes it hard for businesses to know what to expect or how
to plan ahead.

6.State growing-control:
state’s growing control over business activities means the government is getting more involved in how
companies are run, often stepping in and influencing decisions.

7.Corruption:
One of the major problem along with others in Russian business environment is corruption. Navigating a
system riddled with corruption increases operational costs, as businesses must often resort to informal
payments or influence networks to resolve issues or gain approvals. This undermines the rule of law and
transparency, creating a volatile and unpredictable business environment that discourages long-term
investment.

8.Weak Judiciary:
Russia’s judiciary is considered weak because it often lacks independence from the government and
powerful elites. This means that courts and judges are frequently influenced by political leaders or
wealthy business figures, rather than making decisions based strictly on the law. In many cases, the legal
system can be used to serve the interests of those in power, rather than ensuring justice for everyone
equally. For example, in high-profile business disputes, foreign investors or individuals who don't have
strong political connections may find that the courts side with local or government-backed interests,
even if the legal facts should be in their favor. Corruption also plays a role, with reports of bribes or
pressure influencing court decisions. This undermines trust in the legal system and makes it risky for
businesses to rely on the judiciary for fair outcomes, particularly in cases involving property rights,
contracts, or disputes with the state.

9.Unclear Economic Strategies:

Russia’s economy is considered unclear because the government’s long-term plans and policies are
often inconsistent or unpredictable. Instead of having a clear and stable economic strategy, the
government frequently shifts its focus, which creates confusion for businesses and investors.

Difficulties being Faced while investing in Poland:

1.setting up a legal entity: setting up a legal entity in Poland involves multiple steps, including
choosing a business structure, registering the company, and opening a bank account. Foreign investors

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may find the process complex, as all documents and procedures must follow Polish regulations. The
legal process can be time-consuming, and investors need to understand local laws to avoid delays.

2.Reporting and Taxes:

Companies in Poland have many reporting requirements, such as submitting annual financial
statements, tax returns, and social security reports. Corporate taxes are 19%, with a reduced 9% for
small businesses, and VAT is 23%. Foreign investors need to comply with these rules, which can be
challenging due to the paperwork and deadlines.

3. Employment Regulations:
Polish employment law requires written contracts, standard working hours, and a minimum wage.
Employers must also provide benefits like sick leave and annual leave. Foreign investors need to follow
these regulations carefully, which can involve additional costs and administrative work.

4. Language Barriers:

While some business documents can be in English, many legal documents need to be in Polish. Investors
may need to hire translation services, which can add complexity and cost to business operations.

5. EU Law Compliance:

As a member of the European Union, Poland follows EU regulations on data privacy, consumer
protection, and environmental standards. Businesses need to adjust their practices to meet these rules,
which can be difficult for foreign companies unfamiliar with EU laws. Overall , these challenges, from
legal processes to regulatory compliance, can make it harder for foreign investors to operate smoothly
in Poland.

Risks Consideration:
Now we have analyzed all the issues associated with investing in both these countries that we should
encounter while starting our business activities in any of these states. Along with the Issues it is very
important to analyze the risks that our business activities may suffer with. Deciding where to invest
$100 million between Russia and Poland, with both offering similar long-term returns, the decision
largely depends on the risks associated with each country. Here's an assessment of the key risks:

1. Political Risk:

Russia: The political environment in Russia is highly volatile. It is governed by an authoritarian regime,
and ongoing geopolitical tensions, particularly the conflict with Ukraine, exacerbate this risk. Sanctions
imposed by Western nations have hurt the Russian economy, and additional sanctions could further
destabilize investments. The Russian government has also shown a tendency to take control of foreign-
owned assets, particularly in sectors like energy, which adds to the uncertainty.

Poland: As a member of the European Union, Poland enjoys political stability and a strong institutional
framework. Although there have been some tensions with the EU over rule-of-law concerns, Poland

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remains far more predictable than Russia, with much lower risk of government interference in private
businesses or nationalization of assets.

2. Economic Risk:

Russia: Russia's economy is heavily dependent on natural resources, particularly oil and gas. This makes
it vulnerable to swings in global energy prices. Additionally, the impact of international sanctions has
reduced access to Western markets and technologies, which constrains growth. Investors may also face
issues with repatriating profits due to capital controls and high inflation.

Poland: Poland has a diversified economy, driven by sectors such as manufacturing, services, and
agriculture, and is well-integrated into the EU single market. It has been one of Europe’s fastest-growing
economies in recent years, thanks to EU funding and foreign direct investment. Economic risks in Poland
are primarily tied to global trends, rather than internal instability.

3. Legal and Regulatory Risk:

Russia: Russia’s legal system is often regarded as unreliable and lacking independence. Corruption
remains a significant challenge, and foreign investors may find themselves disadvantaged in legal
disputes, with the system frequently favoring local interests.

Poland: Poland follows the EU legal framework, which provides a high level of protection and
predictability for investors. Despite some political tensions over recent judicial reforms, Poland’s
regulatory environment is transparent and stable, offering far greater legal security compared to Russia.

4. Geopolitical Risk:

Russia: Russia’s involvement in various conflicts, including its current standoff with Ukraine and NATO,
presents substantial geopolitical risks. Increased international isolation, military escalations, or new
sanctions could further destabilize the investment climate. Moreover, companies operating in Russia
may face reputational risks due to the country’s contentious global position.

Poland: Poland's geopolitical risks are relatively low. As a member of NATO and the EU, it benefits from
strong security and diplomatic relationships with Western countries. While it shares borders with Russia
and Belarus, its alignment with the West reduces the risk of major geopolitical disruptions.

5. Currency and Financial Risk:

Russia: The Russian ruble is highly volatile, and economic sanctions have led to frequent swings in its
value. Investors face significant risks related to currency fluctuation and may encounter difficulties in
repatriating profits due to capital controls imposed by the government.

Poland: The Polish zloty has remained relatively stable, especially in comparison to the Russian ruble.
Poland benefits from its close alignment with the Eurozone, and currency risks are generally lower for
investors due to better access to European financial markets.

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6.Operational and Social Risks:

Russia: Doing business in Russia can be challenging due to bureaucratic hurdles, government
intervention, and widespread corruption. The labor market is constrained by demographic issues, and
foreign investors may struggle to navigate the system without strong political connections.

Poland: Poland has a well-educated and cost-effective labor force. Labor costs are lower than in
Western Europe, and the country provides a more open and transparent environment for foreign
businesses. Operational risks are significantly reduced compared to Russia, given Poland’s adherence to
EU standards.

7. Sanctions and Compliance Risks:

Russia: Investing in Russia involves considerable compliance challenges due to existing and potential
sanctions from the U.S., EU, and other Western nations. Some industries are off-limits to foreign
investors, and any escalation in geopolitical tensions could result in further sanctions, complicating
business operations.

Poland: Poland faces no such sanctions risks. As part of the EU, it benefits from a stable regulatory
environment, making it much easier for international businesses to operate without fear of sudden
policy changes or international restrictions.

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 Risks Comparison of Both Countries
Russia: Poland:
Political Risk
High volatility, sanctions, asset nationalization risk. Stable, low government interference.

Economic Risk
Resource-dependent, sanctions, inflation, capital Diversified, EU integration, stable growth.

controls.

Legal and Regulatory Risk

Corrupt, biased legal system. Transparent, EU-aligned laws.

Geopolitical Risks

High risk from conflicts and sanctions. Low risk, EU/NATO member.

Currency and Financial Risk

Volatile ruble, capital control issues. Stable zloty, low currency risk.

Operational and Social Risks

Bureaucracy, corruption, labor issues. Skilled labor, low costs, EU standards.

Sanctions and Compliance Risks

High sanction risk, sector restrictions. No sanctions, stable regulations

Conclusion:

After analyzing the issues in both countries we have concluded that if we want to invest in Russia, our
company will suffer more as there are serious major issues associated with Russian business
environment like tax rates policy, lack of transparency, unclear economies strategies etc. as compared
to that of Poland where problems are not that major to be tackled.

In which country we would invest finally?

We have decided to invest in Poland for our company.

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Why Poland?
We have chosen Poland over Russia for the investment because it has fewer risks in several important
areas. Poland is politically stable, being a part of the European Union and NATO, which provides a safe
and predictable environment for business. In contrast, Russia faces political uncertainty and ongoing
sanctions. Economically, Poland has a strong and diverse economy linked to the EU, offering stability,
while Russia depends heavily on oil and gas, making it more vulnerable to price changes and sanctions.
Poland also has clear legal rules that protect investors, unlike Russia’s system, which struggles with
corruption. Geopolitically, Poland is safer and more secure, while Russia is involved in conflicts and is
more isolated internationally. Additionally, Poland’s currency is stable, it has a skilled workforce, and its
business environment is more welcoming, making it a safer choice for long-term investment.

The End