Time To Sell Russian ETFs and Stocks 32 comments
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We recommend selling any remaining positions of Russian funds and companies, even though the Russian market is already down considerably this year.
The Russian market could recover handsomely and make huge profits for those who buy in now, but it may also have significantly farther down to go.
The risk we refer to is not a fundamental risk of Russian national and corporate growth and profitability. In fact, we think the major Russian companies will continue to grow rapidly.
Our concern is that Russia has made a U-turn in its posture toward private capital and toward the West in general, and the United States in particular. That U-turn could be the harbinger of adverse political or even military events that could smash the value of Russian securities held by US and other non-Russian investors.
Whether by investors dumping and running from Russia in the event of conflict, or by Russia expropriating and nationalizing foreign assets, we see material event risk in Russia.
There are other exciting markets that do not pose the geopolitical risk that Russia poses. Investors would be better served by seeking opportunity in those places.
In June of 2007, we wrote about Russian expropriation of western oil company assets on trumped up charges. We wrote about naval tensions between Canada and Russia in July of 2007, when Russia claimed territorial and oil rights to the seabed under traditional Canadian artic waters. And in July 2007, we wrote about country corruption rankings in which Russia was ranked as more corrupt than all the other countries for which there are country funds available to US investors, except for Indonesia.
Russia first threatened and has now announced an arms race with the United States. Russia has threatened Europe with interruption of gas supplies in the middle of winter. The anti-west and anti-US rhetoric in the Russian media is strong and growing. This week Russia said that European and US recognition of Kosovo after its pending secession would create an “international emergency”.
Russian bombers recently buzzed a US aircraft carriers and were confronted by US fighter jets.
The recent declaration of independence by Kosovo has created a volatile and potentially explosive situation which could pit Russia as an ally of Serbia against NATO, who support Kosovo, in a direct or proxy land war in the Balkans (the same place that ignited WWI).
CNN February 23 reported, “Russia — which has not recognized Kosovo’s sovereignty — said it has not ruled out using force to resolve the dispute over the territory if NATO forces breach the terms of their U.N. mandate.” This is not a comforting investment development.
Do you want to be invested in a country in such a potentially hostile situation between Western Europe and the United States? Do you think the Russian stock market would fare well in a conflict situation? Do you have confidence that Russia would respect your property rights in their companies in the event of conflict?
Do think Russia would treat your equity ownership rights better in time of conflict than the shabby way it treated the ownership interests of international oil companies in better recent geopolitical times?
These are not the signs of a fertile investment environment and indicate the potential for so much hostility that Russian markets could turn into a boneyard instead of a playground for investors.
Independent of any judgment about who is right and wrong about this or that matter, we are judging the prudence of US investors holding assets in a country that is in expanding geopolitical conflict with the US, and which is posturing about possible military conflict.
Minimizing risks and losses is an important part of managing investments. If you are a speculator and feel you have knowledge and agility, invest in Russia as you please. Otherwise, we think there are better places to seek high return with less risk.
If you ignore the brewing geopolitics, Russia doesn’t look so bad by some measures. For example, looking at BRIC through the RiskGrades.com site, we see these short-term risk (basically volatility) ratings relative to a global stocks basket:
For comparison, here are the risk grades for the US, developed non-US markets, and combined emerging markets (including Russia):
From this perspective, Russia has been less risky than its fellow BRIC members (Brazil, India and China).
From a geopolitical perspective, however, Russia is in a completely different situation. Neither Brazil, India nor China are rattling sabers about an arms race (we don’t think the Taiwan issue is a hot one at this time). The direct commercial relationships between Brazil, India, China and the US create more interdependency than those between Russia and the US. Brazil, India and China are not expropriating foreign direct investment assets. They are not talking about international emergencies in the context of tensions with Europe and the US.
We could, of course, be wrong like the boy who said the sky is falling, but we would rather be safe than sorry.
The mortgage crisis gave adequate warnings before all Hell broke loose, but the markets did a “hear no evil, see no evil, say no evil” routine up to the bloody end. We think tensions like those surfacing between Russia and the democracies of the West may be the canary in the coal mine. Better to seek return elsewhere.
Charts below show 2008 YTD performance of two Russia funds (RSX and TRF) versus other countries.
[click images to enlarge]
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This article has 32 comments:
I'd be very interested to read similar analysis of the political risk in investing in China, India and some of the South American countries.
That's why I agree with your article.
NATO and US becoming increasingly aggressive towards russia, they have encircled russia, pointed their weapons at russia, started an arms race, trying to balkanise russia including other parts of the world and wreaking havoc around the world. But balkanising russia will not succeed; russia is defending international law and the UN. On the other hand the US are breaking international laws and the UN and have as a result sent europe, the world back to the period resembling it prior to wwi. It is the west who will be balkanised, they have inflicted it to others, now it will come back to haunt them.
Enough is enough!
Therefore ,from the BRIC i would rather stayed with the BIC(it has been such a dependable pen and cheap for years)
Western media is extremely biased against Russia, but I think most of this is due to jealousy. Russia has a lot better human rights record than China, plus they have a plentiful natural resource supply and a rapidly expanding economy.
One question, in fact two-
Are you a politician or an investor, I'm confused?
Do you by any chance, believe, that apart from your (obviously) wise/wealthy self, there are no other such W/W types in this world?
Or probably you want to invest in those stocks that the Pentagon approves!
In that case, you're right, do svidaniya!
Russia has been known throughout history to nationalize private resources for government good. It happened at least twice in the twentieth century.
The article is brilliant in pointing things of this nature out and educating those who forget the most important lesson in history that it repeats itself!
Russia is now one of the most politically stable countries in the world as demonstrated by the recent elections and polls in Russia. Putin is not really democratic type but Russia is a big country not used to democracy and Putin did a good job by balancing interests of different groups while strengthening his position. He managed to restore the national pride and create stability.
Making announcements internationally that demonstrate Russian military power is part of the game but the likelihood of open Russian military action is far less than the likelyhood of U.S military action as demonstrated by recent past. Currently U.S. is expanding their bases accross Eastern Europe under the excuse of protection against middle east or korean missile attack which according to russian as well as western military experts is bullshit and if Putin would not respond to this move he would appear as totally stupid. I would like to see what would Mr. Bush administration announce if russia starts installing rocket sites in cuba claiming that it is for protection against nuclear attack from North Korea. U.S. current foreign affairs policy is far more aggressive and the world will probably benefit from having Russia and China as a balancing power against the U.S. military and geopolitical monopoly.
Russia is basically an oil country. And it is the one oil country which does not have to fear U.S invasion. U.S. can invade Iraq, Iran or Panama but not Russia because it would be the end of all financial markets. U.S. can bribe government in Indonesia or Equador to take most of the oil profit but can not bribe Russian government because they dont have to be affraid of being killed by CIA if they dont take the bribe because the Russian intelligence has also certain power.
Military conflict would not benefit anybody.
1) Western investors are heavilly invested in Russia and more funds are coming rather than leaving the country. Their lobbysts will not let war happen.
2) U.S. have problems with economy and the high oil price does not really help them. If they decide to fight with Russia which is an oil super power the oil prices will explode.
3) Russian government realise they need foreign capital and the importance of the integrity of financial system and stock market.
The risk of nationalisation exists but only for the strategicly important companies whose owners will be in serious political confilct with government (e.g. Yukos). Therefore the nationalisation risk can be removed by understanding the ownership structure or selecting the companies which government dont care about. The corporate governance, reporting standards and research available for Russian market is at relatively high level for the large companies some of which are also traded in London or other foreign exchanges. The market manipulation and fraud is far less than in China.
Fundamentally Russia is one of the most attractive markets at the moment. The infrastructure and consumer stocks are safe heaven because of the oil money flowing in already approved budgets in this direction regardless of the U.S. recession which guarantees good results of companies in these sectors in next few years. In the same time the valuations are very attractive - PE around 10 compared to PE around 30 in China.
To sum up, if one would assume the scenario of escaleted conflict between U.S. and Russia it is better to sell everything and enjoy the cash before it starts. Otherwise Russia is probably the safest place to be invested at the moment.
The USA political, economic, and military power are in decline. American industrial base is in total decline. America financial system in a very terrible crisis. America produces less and less and consumes more and more. US$ as the international reserve currency is in a mortal danger.
The Iraq adventure terribly undermined America. Iraq, a third-world country, exposed the USA weaknesses.
At the same time, China, India, Russia will grow and flourish. Back in the XX-century, Russia lost the arm race to the USA. In the XXI-century, America is about to lose a new arm race to combined forces of China and Russia.
Good bless America to escape a depression in the nest few years.
I'm going long despite this article, based on Russia's fundamentals!
Good question about which emerging countries are less at risk in times of regional and global strife. I have some ideas on that and will publish an article soon.
Russians do not use the same alphabet as English, so none of the spellings on this site are actually the real spelling -- wrong alphabet.
I found a post that claims the expression to mean as follows (no idea if it's correct, but it seems plausible -- perhaps a Russian speaker in the readership will comment on that)
"Technically do svidanya means "God be with you." It is used in formal settings and with superiors/older people. I find it interesting because the English equivalent "Goodbye" is a mutated form of "God be with you," as well.
The informal "Goodbye" (used with friends and/or people of the same or younger generation) in Russian is pronounced 'bok-A. "
The author appears to be a big backer of the US foreign policy and its assertiveness (tons of examples, the most recent one - shooting the satelite to test missle defence system). I would suggest to the author not to be hypocriticle and respect the right of other countries to have their own opinion and a course of actions on the global arena. This however does not mean that Russia is seeking an arms race and a military conflict. Russia under Putin and soon Medvedev is in quite reasonale state of mind and will continue to respect rules of business and rights of foreign investors.
I see no bigger political risk in Russia then compared with other BRIC contries.
Why?
Either Russia or the U.S. (if he is a U.S. investor) could cause his investment to become worthless.
How?
The U.S. could make owning Russian business interests illegal (as they did for Cuba and Iran). That would cause a flood of sales that would crush values, at least during the time U.S. investors would have to liquidate.
Conversely, Russia could take actions to nationalize Russian assets held by U.S. persons, in the same way that the U.S. has done in times of war with, say U.S. assets of individual German investors in WWII.
We were not at war with Saudi Arabia when then forced all foreign investors out of their country (don't know, but was the price "fair"?).
Venezuela has recently confiscated US company assets at unfair prices. Is there reason to believe that they would never confiscate ownership interests of US persons in Venezuelan companies? They are ready to confiscate businesses from their own citizens -- why not those of Americans? Are you comfortable that Russia would be different in a time of conflict?
Russia seems to have taken the assets of its citizens without due process in some high profile cases in recent years when they were political problems. Why wouldn't they take the shares of U.S. investors in Gazprom if the situation between the US and Russia became "hot"?
If you think Russia and the U.S. are going to be OK together, then investing in Russia is probably a pretty good idea. We think there is a problem that is growing and that the potential benefit of investing there is not sufficiently greater than the benefit of investing elsewhere to compensate for the apparent geopolitical risks.
If we are wrong, we don't expect to lose money, just make it someplace else. If we are right, we will save heartache and capital losses. You don't have to have money in every market.
We won't criticize you if you judge the risks and opportunities differently. You may be right - we just don't think it's worth it.
Very smart and fresh ideas. Top Richard Shaw!
1) Nationalisation risk
Comparing populist government of Venezuela with Russian government is propably little bit unfair.
The developments associated with end of Mr. Putin's president mandate indicate positive attitude. The government has managed the transition of power in very professional manner. Also Putin has chosen Medvedev, not Ivanov, as a replacement for him. Medvedev is very liberal, intelligent and much more market economy based person then any of his colleagues in the presidential administration. This is clearly a positive sign for informed investors.
Disagreement of Russian government on certain issues (Kosovo, Iran, ...) is pragmatic a) it prevents the government from loosing face in front of the russian population b) certain level of global instability helps Russia because the oil prices go up. If they dont disagree they would be wasting their political "brand". Same is if Coca Cola sells the drinks without putting on the bottles Coca Cola brand which they invested huge money in.
Regarding nationalisation of oil industry Russia said 8 years ago that oil industry is a strategic asset for the state and that it will be increasing its ownership control. There is no recent or unanticipated change in government policy. Surely who wants to invests in oil or defence industry must be careful.
2) Potential ban on investment in Russia
Making investment illegal in countries such as Iraq, Afganistan etc. which are marginal markets where most institutional investors dont know these markets exists is different than preventing investment in Russia which is BRIC country with huge level of investment and the investment industry employing one of the highest paid investment professionals in the world of which large number are U.S. (and other western countries) citizens. I dont think the U.S. government could get away with stoping it - the guys from Goldman, ML, Morgan Stanley, Citibank etc. and the multinational corporations owning Russian assets would go mad.
Anyway, I am biased because I am invested in Russia at the moment. Nevertheless I am very interested in opinions which markets are currently better than Russia?
I think mininimizing risks and losses is the PRIMARY
part of managing investments.
Why anyone would gamble (there is a distinction between investing and gambling) in Russia is beyond me. Or China (50% rigged market) for that matter.
I have more opportunities on my radar (long and short) in the civilized world than I can take advantage of. The work comes in deciding which 100 issues out of a couple hundred to deploy into.
Who knows what the hell is happening in a communist country?
While it effectively encourages investment in Russia, it does not address risk issues. We agree with all of the points Barring makes, and Russian stocks may continue to well. Our concern is that world events could turn adverse and spoil the Russia play. We think some other emerging markets offer similar upside potential without as much geopolitical downside event risk.
27th February 2008 16:05
Russia remains an attractive destination for investment, according to Baring Asset Management.
The firm said that with Dimitry Medvedev expected to secure a convincing victory in the forthcoming presidential election the country offers significant potential.
Russia has been blessed with huge natural resources and with energy supply such a crucial issue globally, it has won back its seat at the world table.
"With its rich energy base, appreciating currency, rising foreign exchange reserves and strong balance sheet, we believe Russia represents a very attractive investment opportunity," said Martin Majdaniuk, manager of the Baring Emerging Europe Trust.
"Medvedev is likely to continue with Putin's stabilising policies, having promised Russia 'decades of stable development', while at the same time calling for less state intervention in the economy."
"Do svidaniya" means "until meeting again." "Do" is a preposition roughly translating to "until" it takes the genitive case ending (if I remember correctly) on the word for "meeting." The Russian language employs six different cases that affect the endings of the three differently gendered nouns.
I only know this because I studied Russian very seriously thirty-some years ago. Too bad I didn't keep it up! I could have been right in the middle of things over there right now. Oh well. I'll just invest and hope I'm right.