Russia's Too Risky - Barron's

Russia's stock market (ETF: RSX) rose 4% last week despite its ongoing conflict with Georgia, as "investors seem more worried about oil prices than about a revival of Soviet-style imperialism," Barron's says. Still, despite a low P/E ratio of 7, the magazine says investors can do better elswhere.

There are other markets with attractive P/E ratios, albeit not as cheap as Russia's. Brazil's stock market (EWZ, BZF) is valued at 11x earnings; Mexico (EWW), China (PGJ, FXI) and India (INP) go for about 15x; and Western European stocks trade for an average of just 10x.

It's also important to understand that Russia's high energy-stock weighting is one of the reasons its ratio is so low. Independent Russian major Lukoil (LUKOY.PK) fetches just 5x 2008 profts. That's low, but so are ExxonMobil (XOM) and Chevron (CVX), which trade at 7x, and Brazilian oil giant Petrobras (PBR), which has a P/E of 10.

Pluses: Lots of natural resources; $600B in forex reserves; growing consumer economy.

Minuses: 15% inflation, and the ever-present risk of government intervention (witness: Shell (RDS.A), Mechel (MTL), and BP's (BP) problems with TNK-BP).

Those who must can try Market Vector Russia ETF Trust (RSX), Lukoil (LUKOY.PK), VimpelCom (VIP) and Wimm-Bill-Dann Foods (WBD).

:::::::::::::::::::::::::::::::::::::::::

Sean Maher agrees: Russia's a short.

The increasingly belligerent attitude to foreign investors, immigrants, and neighbouring countries, combined with the endemic corruption and decay now affecting every state institution under the Putin regime, may soon make Russia a bigger geopolitical risk factor for global investors than Iran.

Contrarian Jason Kelly thinks the current conflict "provides an entry into the most reasonably priced of the four BRIC developing countries: Brazil, Russia, India, and China."

Comments

[Respirate:]

Naive people in this country who thought the US had "won" the Cold War must rethink their assumptions. Some saw what they wanted to see, namely a big cuddly Russia, akin to Great britain but with teeth - and equipped with vast natural resources to share. Bush looked in Putin's eyes and saw a "kindred spirit."

The harsh reality is that it was just a time out during which Russia regrouped and rearmed. Round 3 began while we were still taking bows for winning Round 1.

2008 Aug 17 07:34 PM

[Alpha Seeker:]

Unfortunately, the brainwashing lie embedded in the US History books suggest that Russia might be "dangerous". The reality is that historically Russia was on our side during both World Wars. The current administration and the administrations before have vested interest in painting countries as enemies so they can instill fear, justify military spending and ultimately rewrite the history books. This " I will protect you if you elect me " attitude is simply a political play. The people of Russia are peaceful and hope for better lives. Unfortunately in the last 100 years they underwent difficult times, choosing wrong leaders and being taken hostages to dictators and criminal revolutionaries. Finally, after so many years, the Russians have normal, democratic, and just leadership. Putin/Medvedv are great strategists and finally the Russians have improved their standard of living. In the meanwhile we did not elect our best-of-breed leader like John Kerry, instead voting for a good ol' oil cowboy. Our standard of living went mostly downhill and the middle class fell behind compared to countries in the EU. It is the brainwashed nationalist in the administration that hold onto the expensive idea that US is the only superpower. That is no longer true, we cannot pay the price for it and you will have both -EU and China laugh along at this idea. We can no longer afford to play police-state, spend money abroad and act out on some leader's sick military ambitions. There is nothing to be gained by having large military. It is time we face our own people, education and health-care issues, invest in our own development not in the stakes of greedy oil corporations. Look at the space-team Russia-US-EU. This is the model of the future. Finally there is a bright light coming to us and his name is Obama. We are going to invest in solar, wind and nuclear and become energy independent. We won't need the Middle East at this point. The time is coming and once again, remember that neither Russia, nor China and EU are enemies. They are our friends, not our slaves.

2008 Aug 17 08:26 PM

[Billco42:]

Sorry to have to say it, Alpha Seeker, but that sort of brain dead thinking (along with comensurate inactions) would only lead us to become further enslaved and more vulnerable-the russian government (the only real power there) is not our (the west's) friend nor it's peoples friend. It is essentially a dictatorship masquerading as a democracy, and some of our current problems have derived from choosing to think otherwise. Although it is certainly true that the current administration is both incompetant and fiscally irresponsible, I would hardly look to the naive softball approach of an obama or the democratic party establishment to rectify the situation. As for the size of our military, I think it's apparent (on the basis their own actions) that the both the chinese and russians don't think building strong militaries are a waste of money. In essense, the only thing that is keeping russia remotely in check in georgia is the knowledge that we (the USA), in coordination with our eastern european allies, can and will take appropriate measures. Appeals to civility alone have little effect on them. Wake Up!

2008 Aug 17 11:59 PM

[Russian Bull:]

This has to be one of the most thoughtless articles I have read on Seeking Alpha in a long time. Someone give me back those 90 seconds. No, okay, well, let me try and save the future readers: I think Russia is oversold and the Ruble is undervalued and this article blows chunks.

Russia has its problems--no doubt--but in terms of risk I think the perceived risk is much higher than true risk in reality.

Funny, the media makes a lot of noise over Yukos and BP, but the fact of the matter is that Russia has declared the oil and gas industry a "state secure sector". The Western National oil companies are no longer needed by Russia and their contracts are being re-negotiated. That's life in the big city. Ask the shareholders of IndyMac about governmental takeover risk.

2008 Aug 18 06:05 AM

[samij:]

hey bull, why do you invest in a country where contracts are re-negotiated after you have made your investment and you're no longer needed? investing is ok, expecting return on investement is not? i fail to find the incentive for making investments under such terms.

2008 Aug 18 06:55 AM

[Norman Lepo...:]

I agree with the author, however Georgia was the aggressor. Plus, why in the world are we putting a missle systme in Poland? Could you imagine if Russia put the same type in Mexico? Perhaps the danger is really with the USA's horrible leadership?

2008 Aug 18 10:00 AM

[Urbane Gori...:]

I agree with Lepoff MD... Not only did Georgia begin this skirmish, but they did so against the explicit advice of the US. However, we are also culpable. Not only do we have in excess of 200 ** military advisors** in Georgia, but we funded their military. It's pretty clear that our actions in Poland, coupled with our activities in the periferal States around Russia are just a furtherance of Dubya's failed foreign policies. You only have to think back to the 'Bay of Pigs' incident to realize how Russia feels right now. **Our bad**.

jegan

2008 Aug 18 12:47 PM

[Chris B:]

Billco42, keep in mind that the money you and I spend to fill up our gas-guzzling trucks financed Russia's war on Georgia. It also supports the market where Iran (OPEC's #2 producer) gets $115 per barrel, which they then use to finance their nuclear weapons program. Venezuelan communism is funded by American money, otherwise it would have collapsed long ago. Somewhere in Saudia Arabia, a terrorist-training madrassa is operating thanks to the dollars I donated the last time I had to buy gas.

At some point in the near future, we will have to realize that cutting oil usage is the most important national security investment we can make. B2 bombers, F22 fighters, and million-dollar cruise missles are useless if we are hostage to these oil-producing dictatorships. Of course, all these concerns will be forgotten by the American public once gas goes down to $3/gal. (and we think how lucky we are to pay such low prices!). Then you'll hear the talk radio geniuses spouting about what a waste of money mass transit is.

Russian Bull, I'll take my chances loaning money to the local mafia before I chase a couple percentage points of return into a dictatorship that routinely seizes investor's money with no recourse in a country with no rule of law.

How much wealthier would our country be if we did not send a billion dollars a day to our adversaries and then spend a billion dollars a day on defense to defend against them?

2008 Aug 18 12:51 PM

[Alpha Seeker:]

Chris B, before you critize Russia for seizing investor's money and punished the greedy oil billionaires for not paying taxes- why don't you look at how the US Government bailed out the criminals at Bear Sterns and paid for them with taxpayers money. If you think US capitalism is different then Russian, think again.

2008 Aug 18 01:46 PM

[Brahm:]

To me it looks like Russia is no different than any other major orsuper power or colonialist. Dangerous? Perhaps so; depends on the beholder, or one's appreciation of history. The US did not tolerate even the Sandanistas in Nicaragua, except that the Sandanistas were not so much a Soviet lackey but in fact only local leftists fed up with corruption and authoritarian elites supported by the right wing barons tacitly backed by the US. Ditto in Cuba before Castro was squeezed by the US. What can one say about a small enclave subjected to "liberation" overnight in Granada? Perhaps, leftists and authoritarians of the Left variety, but n o more mendacious than any third world potentate!.

Then there was Vietnam cooked up by the US to be an international Communist conspiracy by Russia and Mao, and posing a threat and take-over of Southeast Asia by international communism. Less than one year after the conclusion of the Vietnam war, China and Vietnam (uncle Ho!) went at each other in a war that lasted a few weeks with before the Chinese withdrew with a bloody nose! There was 1500 years of history between China and Vietnam which was ignored by the conspiracy theorists in the US. This history of conflict and repeated attemtpts to subjugate Vietnam by the Chinese militated overwhelmingly against the conspiracy theoreticians of the USA hawks!
Yet, it did not prevent an American blunder, as bad as Iraq.

There are parallels from British and French colonial history in the Middle East and elsewhere in the the world.

Much of the foregoing prompts me to be skeptical about this drumbeat beating in the West against Russia. Russia is just asserting its interests on its borders. [Just like us with our Monroe Doctrine in the nineteenth and twentieth centuries!] Russia is not going to tolerate hostiler neighbours or influence/threats from distant powers on what it thinks its neighbourhood or sphere of influence. If it can help it! This is classic defence, and the way a major/super power always responds to those who threaten to upset the balances on its borders or perceived sphere of influence!

2008 Aug 18 02:19 PM

[notsosmart:]

cant figure out all the above noise.if you feel russia & china are ok to put your there -do it.i dont trust either one.i can do just fine without either.

2008 Aug 18 02:41 PM

[investor88:]

There will be a time for BRIC investing but not now, the timing does not right now with the world in financial turmoil. Agree with Barron's view that Russia is at the bottom of the pick of the BRICs because the government is not investor friendly.

2008 Aug 18 09:27 PM

[Alex Filonov:]

Why so much noise? Russian bubble popped even before invasion in Georgia. Make no mistake, it's not "peacekeeping action": one of the sides can't be peacekeeper. It's blunt and shameless attempt to restore old USSR using military power.
Investment in Russia is as good as lost. Russian budget goes into red if oil below $110, Russia claims currency reserves of 600 billion dollars, but Russian government companies owe Western banks close to 400 billion. Investors started running away more than a month ago. Russia is between sell and sell short right now. If government continues current policy, it will nationalize most of industries in couple of years (oil and gas are already nationalized for all practical purposes). If you think that investors are going to be compensated, read about Yukos.
Read more in my blog, starting Nov last year.

2008 Aug 18 09:44 PM

[viva:]

If Russia was such a great place to live, why are 70% of pregnancies being aborted? Reclaiming lost territory is their growth engine.

Source: Mark Steyn, America Alone: The End of the World as We Know It

2008 Aug 18 10:23 PM

[GlobalInvestor:]

Most of the time a comment about Russian markets turns into political discussion. My view: 1) Dont buy Russian blue chips. It doesnt matter whether Russia started or Georgia started, US is right or Russia is right etc. - the decisive factor is that many investors especially from US think Russia is not safe and overreact to negative news which are already inflated by western media. 2) Buy Russian small caps because Russian fundamentals are fairly solid, it is ridiculously cheap market and the small caps are traded primarily by locals and some european investors who see the political risks more realisticaly.

2008 Aug 19 08:43 AM

[dtblount:]

I think we are all forgetting that Russia is an EMERGING MARKET. It is not a developed market and simply cannot be compared to the US or the Eurozone on any real level. Of course there is risk and the threat of geopolitical instability. People don't invest in Russia because of stability and low volatility. They invest because the perceived gains in individual investments are believed to outweigh perceived risks. There are great companies in every country on earth...some are easier to find and invest in than others. Even Zimbabwe has great companies...

In a broad, macro context, I'm extremely bearish on Russia in general...but some individual companies look great to me. However, if commodity prices slow down, I think the Russian economy will see the current problems magnify, as well as the emergence of new issues. I don't think the economy is diversified enough and a lot of new wealth is leveraged on the commodity boom...


Cheers

2008 Aug 19 11:57 AM

[buywhenther...:]

Looking at these comments reinforces that when everyone says buy, it is time to sell.

This article was written in August, just two months later, Russia has crashed. Now it is time to buy!

2008 Oct 17 01:08 PM