From Russia With Bitterness

By Eric Roseman

One of my biggest mistakes a few years ago was placing a bet on one of Russia's largest oil companies. In hindsight, despite the incredible value still offered by this investment, I've lost more than 50% of my capital...and not strictly because of plunging oil prices.

Russia is not governed by market capitalism. The market has evolved into a twisted version of despot capitalism whereby Vladimir Putin sets the tone for the market, deciding which companies should be nationalized (a.k.a. victimized), purged, and eventually placed under full or partial state control. The government typically targets natural resource companies for this exercise and doesn't care if foreign investors get caught in the middle of this confusing web of intervention.

Foreign investors have been raped over the last few years in Russia, including mutual fund managers raided by domestic authorities because they expressed negative views about the economy. Shareholders' rights mean nothing, securities laws really don't apply to the market, and Putin and his buddies change the rules of the game when they please.

This whole saga has intensified since 2008, with Russia's invasion of Georgia last summer acting as the last straw as foreign investors began a vicious exodus out of Russian equities and, ultimately, the currency, too.

Since hitting a high in May 2008, the Moscow RTS Index has tanked more than 70% while the Russian ruble has begun to devalue against most foreign currencies, already down 15% in 2009. The Russians are rapidly depleting their foreign exchange reserves over the last six months to support frail domestic banks, a weak currency, and a contracting economy heavily dependent on commodity exports.

The oil company I still own might eventually rally again...one day. It is one of the largest oil companies in the world and, based on its plunging stock market capitalization, trades at a mind-boggling 75% discount to Exxon-Mobil (XOM) - the world's largest company - despite producing almost the same annual oil production.

If not for Putin's constant meddling in the market I doubt this company would have declined so precipitously over the last eight months - much worse than most oil companies in Europe or in the United States.

But the rules of the game in Russia change constantly. In this environment, who needs more problems? I'll never invest in Russia again.

Comments

[Dan Walker:]

While i feel your pain, "when you run with the big dogs"....

Feb 03 08:56 AM

[PROXIMO:]

After that terrific article, I can't fathom why you still hold the oil company.

Feb 03 10:19 AM

[raytayzmd:]

..."Shareholders' rights mean nothing, securities laws really don't apply to the market, and Putin and his buddies change the rules of the game when they please."...why, gosh, what does he think he is -- a capitalist?!!!

Feb 03 10:20 AM

[auto44:]

Trust and the rule of law is under pressure the world over with a large chunk of stupidity on the part of both banks and elected officials amongst others. But the Russian mafia controls Russia and that is a long way from what goes on in most of the world.

Feb 03 10:28 AM

[Ferdinand E...:]

"Russia's invation of Georgia." That's interesting. Five former US foreign ministers said that Georgia fired the first shots, which - incidentally - were not at the Russian army, but at a housing development. Even so, the presidential candidate who wanted a hundred years of war in Iraq and Afghanistan apparently used the expression "we are all Georgians".

Personally I think that Russia is an interesting prospect, but of course not now.

Feb 03 10:36 AM

[Toffe:]

A few points to make to this rather whiny rant:

1. Emerging markets have higher risks and returns than evolved markets. You got in with high return expectations at the wrong moment.

2. Your comments are neither specific nor particularity accurate. Yes, natural resources companies of strategic value have been part nationalised during the last decade. The main reason is that, using your vocabulary, the assets where being raped in the 1990s. Overproduction caused dwells to be destroyed, no new investment went in to develop replacement fields etc.

3. I would hang on to Gazprom, Lukoil stock. I assume its one of these, since amature investors only have access to these two Russian oil stocks via ADRs listed on NYSE. The Russian market was destroyed in the crash at the end of 2008. They will recover when the extreme risk averseness abates and fundamental kick in.

P.S. KGB is called FSB nowadays. I suggest you update your dictionary if you are expressing opinions about a topic.

Feb 03 11:07 AM

[Maya_:]

Eric - you say "One of my biggest mistakes a few years ago was placing a bet on one of Russia's largest oil companies." & yet you (Sov. Soc.) claim to help people achieve Total Wealth. As an investment advisor you should be ashamed of yourself. People buy the lottery or visit the casino to place bets. Investing, is different; be it a car, a house or a stock, it is bought for the value it represents; not a mindless bet. I guess you lost your shirt because having made a bet, you failed to invest. Nevertheless, as a mindless speculator, I am sure your bet will pay back well; when it does, keep in mind that it was a random bet and not a well reasoned investment decision that got you your returns!

Feb 03 11:32 AM

[Socialism c...:]

And do you think you'll fare better with domestic companies, given our neo-Marxist intrusion into business and into personal lives??? The writing is on the wall for the U.S.A. -- sadly. :(

Feb 03 12:55 PM

[notsosmart:]

investing has become a mindless bet as all are liars & have an agenda.its hard enough here but if you go off shore you may lose quicker.dont whine.china & russia can & will change the goalpsts at any time.russia defaulted 2x in recent history.

Feb 03 01:24 PM

[searcher:]

Russia will always 'meddle' in their resource sectors, even if nowhere else. Most realistic investors would accept that, where there any confidence that the meddling would be directed towards efficient and persistent development and production. The gang in charge has not the wisdom to see that as a goal nor the patience to effectively persue their mendacity. Current mentality is that of impatient criminality.

Feb 03 02:11 PM

[Paul Fekula:]

Here's a question for you. Did the stock market in Russia plunge, because that is really the case, or because western investors believed that to be the case. Russian stocks are definitely undervalued, but how much of that is due to the western media picking on it as opposed to the realities in Russia. One glaring factual error I see in your piece is the assertion that Russia invaded Georgia. Last time I checked, Georgia invaded South Ossetia and started killing Russian peacekeepers, which sparked the war. Having lived in Russia for 2 years, I can tell you, there are a lot of problems, but Russia's problems are not so unique. They are the same problems many emerging economies face. Russia just gets a worse rap, because Russians are white and European, whereas the gross abuses that go on elsewhere are OK, because they are not white.

Feb 03 03:10 PM

[auto44:]

PF, What I saw didn't look like peace keeping, It resembled Russian peace keeping in Afganistan many years ago. Russia is still the evil empire. I think property rights and the rule of law have a better chance of being respected in downtown Bagdag.

Feb 03 04:31 PM

[ROLEX18:]

I am sorry you lost 50%, I made in the 1990's a small fortune on one stock called Surgutneftegas that in 1997 was trading at 0,006$ a share on RTS, when I asked my bank Mercantile Discount Bank to buy me 10 million shares, my friend who is a trading dest executive there said that I must be crazy, he said they can buy it only through 2 corresponding banks in Zurich and New York, I was confused why 2 banks are needed for a penny stock in the city of Surgut and he convinced me not to buy it at all as my commissions would be few thousand dollars, it made me nuts as already then on Etrade commissions were about 20$.
So in the end I bought only 1 million shares and sold them for more (200% or less), if I would keep them till 2007 before the biggest Oil bubble, my million sharres would be worth 100 TIMES MORE, and on the top last year 500 times more.
Russia has it's toughs and throughs, but in general you can make a fortune there from nothing, 10,000$ invested in some Rouble option or RTS Index calls or puts 1-2 years from now, surely will reward rightly positioned trader with 2,000,000$ as in the next 12-24 months something is going to happen there.
A revolution?
Your stock you write about is not a secret, it is LUKOIL.

Feb 03 05:13 PM

[Paul Fekula:]

I am not going to suggest that Russia is an utopia. It is very far from it. However, articles like this beg the question, "why did the Russian market tank?" Did it tank because of the lack of rule of law? Or did it tank because of the perception of the lack of rule of law? There is no question that Russia is still very far behind the western world in terms of development, however any Russian-speaking expat in Moscow will tell you that Russia is presented in a highly distorted light in the western media. Think about it: when was the last time you read a positive story about Russia in the Western press? Is this to say nothing positive has occurred in Russia since Putin came to power?

Feb 04 12:01 AM

[Dave Wrixon:]

Talking up your own investments in this way is going to make all the difference is it?

America has got involved in markets and politics of every oil-producing country in the World in pursuit of its own greed. And each time they get involved they stand to get burnt. Still ahead of the game in a few places, notably Saudi Arabia, but trust me even that won't last.

Russia was in a state of total disarray after the collapse of the Soviet Union. That situation was unfairly exploited both internally and externally. Putin is right to attempt to restore some kind of balance., after all he was democratically elected to protect the interests of the Russian people.

Feb 04 04:19 AM

[Alex Filonov:]

On Feb 03 03:10 PM Paul Fekula wrote:

> Here's a question for you. Did the stock market in Russia plunge,
> because that is really the case, or because western investors believed
> that to be the case. Russian stocks are definitely undervalued, but

It doesn't matter why. The fact that it plunged is enough. This is money game, and the only thing that matters is: have you got profit or loss? If market completely depends on Western investors, who are robbed at any opportunity (see Yukos, TNK-BP, Sakhalin oil fields etc.), then they define prices. From their (and mine) point of view, Russian stocks are overvalued.

> how much of that is due to the western media picking on it as opposed
> to the realities in Russia. One glaring factual error I see in your
> piece is the assertion that Russia invaded Georgia. Last time I checked,
> Georgia invaded South Ossetia and started killing Russian peacekeepers,
> which sparked the war. Having lived in Russia for 2 years, I can
> tell you, there are a lot of problems, but Russia's problems are
> not so unique. They are the same problems many emerging economies
> face. Russia just gets a worse rap, because Russians are white and
> European, whereas the gross abuses that go on elsewhere are OK, because
> they are not white.

Feb 04 12:09 PM

[Alex Filonov:]

On a market, perception is reality, until proven otherwise. Until Russia proves that there is rule of law in the market, perception is that there is none. Investors vote with their money, so it's their perception that matters. Don't like it? Who cares.

As for Western media being biased about Russia, I read both Russian and Western media. At least Western media doesn't spread propaganda like official Russian does ( "USA is going to have Civil War and split" or "Inevitable demise of US and rise of Russia"). And of course, Western media is also biased because in Russia all opposition media is destroyed, with some small exceptions of several local radio, TV stations, several newspapers and Web sites. Frequent murders of journalists, always of democratic press, somehow don't improve image of Russia in the eyes of Western media (and in mine).

On Feb 04 12:01 AM Paul Fekula wrote:

> I am not going to suggest that Russia is an utopia. It is very far
> from it. However, articles like this beg the question, "why did the
> Russian market tank?" Did it tank because of the lack of rule of
> law? Or did it tank because of the perception of the lack of rule
> of law? There is no question that Russia is still very far behind
> the western world in terms of development, however any Russian-speaking
> expat in Moscow will tell you that Russia is presented in a highly
> distorted light in the western media. Think about it: when was the
> last time you read a positive story about Russia in the Western press?
> Is this to say nothing positive has occurred in Russia since Putin
> came to power?

Feb 04 12:18 PM

[Gyoza Mimi:]

I want to second Alex Filonov's opinion.

West can work on perception by sugar-coating existing facts. Russia creates these facts. DJA tanked 50%, Russian indexes down 70-75%. Yet, Russian media paints a bleak picture of the "American Crisis", with American economy collapsing. There are pictures of Americans made homeless by foreclosures. Yet, there is not a single work of ruble devaluation, collapsing Russian market and foreign investors running for the door in spite of the Georgian war and BP-like situation. Contrary, Russian media draws a different picture on people taking money from the US and throwing them at Russia - the only rising superpower. No talks of impending budget deficit, collapse of the only export prices (energy, nickel and other commodities), riots in Russia. Nothing.

For foreign investors there are two things to be aware of: currency and political risk. There is no free market in Russia and companies will do what KGB, I meant FSB, commands. No one cares for ownership or anything else dictated by law. The law is written by FSB when needed. Then the currency risk. Sure you can get Russian stocks at bargain prices. Sure they can rally 20-30% without attracting interest of the state. But if the currency tanks, what will you gain for sustaining that political and other risks? Nothing.

Feb 04 11:30 PM

[PROXIMO:]

The source of Russia's contempt for the US is envy, pure and simple. Their chosen system of "government" (communism), collapsed on the world stage. By any yardstick, whenever measured against the US on practically every conceivable front, Russia comes in second. They are aware at every level of leadership in their society that they are abject failures and have been for decades when compared to the USA. Economically, socially, politically, militarily--comparing Russia and US is like comparing night and day, black and white, up and down.


On Feb 04 11:30 PM MeToo wrote:

> I want to second Alex Filonov's opinion.
>
> West can work on perception by sugar-coating existing facts. Russia
> creates these facts. DJA tanked 50%, Russian indexes down 70-75%.
> Yet, Russian media paints a bleak picture of the "American Crisis",
> with American economy collapsing. There are pictures of Americans
> made homeless by foreclosures. Yet, there is not a single work of
> ruble devaluation, collapsing Russian market and foreign investors
> running for the door in spite of the Georgian war and BP-like situation.
> Contrary, Russian media draws a different picture on people taking
> money from the US and throwing them at Russia - the only rising superpower.
> No talks of impending budget deficit, collapse of the only export
> prices (energy, nickel and other commodities), riots in Russia. Nothing.
>
>
> For foreign investors there are two things to be aware of: currency
> and political risk. There is no free market in Russia and companies
> will do what KGB, I meant FSB, commands. No one cares for ownership
> or anything else dictated by law. The law is written by FSB when
> needed. Then the currency risk. Sure you can get Russian stocks at
> bargain prices. Sure they can rally 20-30% without attracting interest
> of the state. But if the currency tanks, what will you gain for sustaining
> that political and other risks? Nothing.
>

Feb 05 07:48 PM

[Sublime Obl...:]

I will second Toffe and Fekula's points. I also think Roseman is either a market illiterate or intentionally deceptive.

1. Vowing to never go back because you got burned is stupid (though if 1998 was anything to go by investors will return just the same as soon as their greed overcomes their fear again).

2. Markets are a casino, especially emerging ones. No need to be emotional about it. One must dispassionately look at the facts on the ground and use your skills to identify dangerous bubbles, or grand bargains (as is the case now). Blindly following the electronic herd isn't a winning strategy - that's the whole lesson of buying amidst despair and selling amidst euphoria. Perhaps Eric is bitter not at Russia but at himself for forgetting this.

3. World oil production is depleting and oil will become a valuable resource, so conserving and exerting more control over oil sectors is a good strategy for states with these resources, in my opinion. Investors will just have to suck this up.

Feb 07 12:54 AM