Risk Premiums for Poor Governance

There's a Bloomberg/Businessweek article out that discusses the risk premium that must be paid to finance infrastructure projects in countries viewed as having poor corporate governance practices. The article
VTB-Led Group Pays Twice Emerging-Market Rate on Loan notes that the cost to expand St. Petersburg's Pulkovo Airport is nearly twice that for similar projects elsewhere. The authors, Jason Corcoran and Karen Eeuwens, looked at the syndicated financing arrangement for the Pulkovo project because it is the first project of this scale not to use the Russian government to back its loans.

According to an attorney quoted in the article, banks demand higher interest spreads because of the perceived risk due to inadequate Russian laws. Among the areas of law of concern are corporate governance laws.

While Russia certainly isn't the riskiest nation (it ranked 20th in a recent study), this deal highlights the risk premium lenders expect when lending money for projects in nations where laws protecting property rights and assuring good corporate governance are inadequate. Couple that with other economic and political problems, and the risk premium expected is even greater.