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Investing in Russia: further notes

Russia's announcement that it would be IPOing some portion of its state-owned enterprises occasioned one very solid post here on SA from Craig Pirrong.  I just wanted to chime in and add a couple of thoughts and data points to his analysis.

First off, Russia tied with Sierra Leone, Ecuador and a couple of others at 146 of 180 countries in Transparency International's 2009 rankings of world governments for their level of corruption (The US came in at 19th).  Russia has been stuck in the 143rd-147th range since 2006, after having ranked as high as 126th in 2005.  President Dmitrii Medvedev's has declared battling against corruption to be a top priority for his administration, but that hasn't changed much just yet. In truth, that's one long row to hoe.

If you have a little time, I recommend watching Bill Browder's video on his experience investing in Russia from the early 90s forward. Browder is the CEO of Hermitage Capital.  He was an active investor and participant in Russia's markets from the early 1990s through 2006, when the Putin administration (which he had supported) refused to let him reenter the country, despite the roughly $4 billion Browder had invested there.  The government then basically stripped him of his assets. The video starts off fun, then gets ugly, but is very instructive.

Despite Browder's experiences, I own some Russian equities and debt in mutual funds and ETFs (EUROX, BKF, FNMIX).  I've been very disappointed in the experience of owning EUROX in particular, but what the behavioralists call "loss aversion" has kept me from selling it.  It's also the closest thing I have to having exposure to petroleum.  As someone with a lifetime academic interest in the region, having some investment exposure to it gives me an incentive to keep paying attention to it.

Through it all, I still love Russia and its people and really want things to improve there.  But stories like how IKEA came to build provisions for independent electricity generation into plans for each new store in Russia in order to protect it from shakedowns by local utilities do not inspire confidence.


Disclosure: EUROX, BKF, FNMIX