Russia Looks Better on Paper Than in Real Life 16 comments
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Russia just declared war… on investors.
As the “R” in BRIC emerging markets, Russia has been one of the hottest places for overseas capital flows in the last ten years. Between 1997 and 2007, capital inflows to the country rose from $4.8 billion to over $50 billion: an all time record.
It’s not difficult to see why. On paper Russia has all the hallmarks of a booming market: a fast-growing economy, dramatic increases in wages and standards of living, and massive currency reserves.
Russia’s GDP has grown at an average annual rate of 7% since 1998. Over the same time period, average monthly salaries have risen eight-fold while unemployment has halved to 6%. All told, 20 millions Russians have risen out of poverty as the country’s economy grew to be sixth largest in the world. And thanks to its massive energy reserves—#1 for natural gas, #2 for coal, and #8 for oil worldwide—Russia sits atop the third largest currency reserves in the world, $581 billion.
However, as good as Russia looks on paper, investing in the country has proven quite problematic. As much as the Kremlin purports to embrace free market capitalism, Russia’s government has a nasty habit of playing hardball with domestic and international firms doing business there—see Yukos in 2004 and BP (BP), Mechel (MTL), Evraz Holding (EVGPF.PK), and Raspadskaya Coal today.
Russia also likes playing hardball regarding energy supplies—it cut off supplies to Ukraine in 2006—and starting cyber wars against its adversaries—Estonia, the U.S. and most recently Georgia. All of these factors combine to make investing in Russia a bit like playing Russian roulette.
However, it wasn’t until Russia physically invaded Georgia this month that investors really started fleeing the country. The Financial Times reported last Thursday that investors have been withdrawing funds from Russia at the fastest rate since the ruble crisis in 1998. They withdrew $16.4 billion in the week of August 8 alone: the second largest weekly drop in 10 years.
Crisis often leads to great value. And Russia as a whole is now quite cheap — the Russian stock exchange has fallen 23% this year and now trades at seven times earnings, one of the cheapest valuations in the world.
But I’d be very careful about putting any money there.
The simplest means of investing in Russia are the two Russian ETFs: Market Vector Russian ETF (RSX) and the ING Russia Fund (LETRX). However, both of these funds are heavily invested in Russia’s massive energy and mineral companies — the very companies the Kremlin has a history of interfering with. So I’d steer clear of either of those.
However, if you’re feeling daring, I’d suggest looking at consumer driven plays in Russia. The macro-trends — Russia’s growing middle class and increased standard of living — are booming. And while even these companies aren’t above political interference — Russia froze food prices from Oct ’07- Jan ‘08 — they’re too politically sensitive for the government to shut down.
Here are a few worth looking at:
| Company | Symbol | Business |
| Wimm-Bill-Dann Foods | WBD | Food products |
| Rostelecom | ROS | Telecommunications |
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This article has 16 comments:
Wrong. RSX chart here contradicts you completely. Investors started their flight in July, by August 1 RSX already lost more than 15% (quite a drop in one months).
Any investment in Russia now is Russian Roulette. Government with every day looks like lunatics running asylum.
Your view on the war between Georgia and Russia is way off the mark and an absolute distortion of facts and reality. fact is, the NATO promised Russia (then Gorbachev) not to expand into former Soviet republics in exchange for getting Germany into the NATO. Nobody in Washingtonm seems to care for that promise anymore. Second, the USA have built up georgia against Russia and propped up a corrupt, selfish and hostile president there. This guy had nothing better to do than to attack - and now washington crties foul when Russia hits back hard and call that 'aggression' and 'unreasonable response' Go figure,. the entire historsy of the USA over the past 50 years is a history of overblown military action against everyone everywhere who seemed too weak to defend against uncle sam.
Using military and economic leverage to influence other countires, and more so neighbours and strategic regions is part and parcel of every regional or international power's policy tools. you can rant about that all day - but please, stop blaming it all on the Russians. That common U.S. mantra is as old, as dumb and as annoying as it gets.
thank you very much
Based on its history and its czarist past, it is expected to protect its national interests, exert influence on its immediate neighborhood, and, when the opportunity arises to its favor, flex its muscles. However, it does not mean that it cannot co-exist peacefully with its immediate neighbours, provided the neighbours don't give it cause to believe ithat its security is being challenged.
Distant powers have to be mindful of this as well, especially if they are not willing to risk their own involvement in direct armed confrontation with Russia. Before they fully become capable, these distant powers or superpowers have to counsel moderation on their proverbial future allies on Russia's borders. In the meantime, these powers should assist these nations in economic development to build internal strength without posing as threat to Russia..
1. Rail against the "oligarchs"
2. Decry any western criticism as "propaganda"
3. Threaten the west militarily
Good article. I would no more invest in Russia than I would invest in Venezuela or the US. In the US the organized criminals aren't brazen enough to be high government officials and officers in major corporations. In Russia, the organized criminals have less need for discretion.
It is risky no doubt. But is US maket any safer? US Financials are down 70-80%, Russia is down 20%. The only valid argument here is that finacials might have bottom ad Russia may be not.
In any case, I bought Gazprom Neft today. It pays nice dividend and I don't have to worry about it going bancrupt.
Of course, everything coming from russians must be propaganda, but everything coming from the US media is 100% unbiased truth. I am russian living in the US. I see both sides. What reason do I have to spread misinformation?
I find that the propaganda machine in the US is very well oiled, and equally effective as the one we used to have in the USSR. Sometimes, I think that it is on purpose US education in history and geography is so limited. Uneducated masses are easier to control.
The world ia a very scary place for an average american.
However, to be a successful investor/ trader one must attempt to see the world the way its truly is .
I think you mean "adjust for cost of living". That said, I disagree. Little things like reliably delivered electricity and water and better quality available goods make US more desirable. Also, there's something to be said for less corruption, more freedom of speech and free elections. It's not quantifiable, but they're part of one's standard of living. US has it. Putin's subjects do not.
If US standard of living and Russia's are comparable, why are Americans not flocking to get in to Russia? Learning Russian is arguably easier than learning English (though not nearly as useful outside Eastern Europe).
I love Russia. It's sad to see it revert to belligerence and state control.
Meanwhile, while our government parades their horror at a country that would 'illegally' invade another country.... (Duh!!!)... the Russians are very busy cozying up to China. Russia will pull out of this with our without the US and Europe.
jegan ;-)
p.s. Notice how the Russians went in and got out. They at lest seemed to have learned something from Afghanistan. Too bad Bush couldn't take the same tactic like his Dad and Regan did. In and out!
This is the best long term chart of the Russian market (TRF) going back 10 years. I was working in investment banking in London in 2003 when smart people I knew were catching on to this story (when TRF was $25/share). Today, those same people are telling me the party is over for now, but not specifically because of Russia, but simply the global macroeconomy is slowing down. I am a seller of Russia too, but not for micro reasons. If anything, Mechel (MTL) is looking like good value at $20/share. Everyone thinks it will get crushed like Yukos, but the owner (Zuzin) has no political ambitions. If the global economy improves, this stock should recover to $40-45/share.