I occasionally moan about how President Putin’s mismanagement is putting companies off investing in Russia. Providing a counterweight to pessimists like me is Bill Cara, securities trader, global market strategist and blogger. He’s writing a series of posts on investing in Russia, with case studies on the energy and mineral industries. Helpfully, for stupid people like me, they’re packed with charts and diagrams.
Here, as Bill sees it, is the bottom line:
For all the negativity in the West about matters of Russian corruption, murderous oligarchs, dysfunctional banks, and inept civil servants, the bottom line is that in the past four years there has been (i) a remarkable success in all Russian capital markets, (ii) a period of extraordinary change in the Russian tax code and budgetary and state financial system, and (iii) several years of such enormous fiscal surpluses that the country is now a net creditor nation and holds sufficient foreign reserves to buy back 100 percent of its foreign-owned debt with enough left over to fund close to a years imports.
Compared to Russia, it is America that is the nation in deep financial trouble.
Russia has strong economic growth (would you believe over 7 percent annually?), strong wage growth and consumer consumption, and a strong Ruble. In fact the Ruble is so strong, there is a worry among Russians that it might be upwardly valued, which would serve to put the brakes on economic growth there.
Although he does note that it’s not all sunshine:
But, just like other emerging economies, like China, India and Brazil, it is quite obvious that Russia is hardly perfect. Taking Yukos away from Menatep and Khordorovsky, on a charge of tax evasion, did hurt the minority shareholders, which will take much time for reputational recovery. It will also take generations, possibly, to solve the impediments in todays civil service, banking and mortgage industries.
He makes a strong argument, especially to a non-economist, non-securities trader like me. A particularly interesting point he also goes on to make is that one of the possible reasons for such negative press in the Western business media is that men like Khodorkovsky has better PR skills than Putin.
Overall though, I’d have to say that if I were a business looking into investing into Russia , I would be extremely wary. In particular, in the light of the fickle way in which the Russian government seems to pursue vendettas against some companies and not others, I’d want to minimise my exposure as much as possible. Which, in practice, means not investing as much as I otherwise would.
It seems to me Bill is a portfolio investor with holdings in different markets, including the US, China, Japan, India and Russia. That way, he diversifies away some of the risks. In general, there is a huge difference between portfolio and direct investment that can be summed up in three words: liquidity, diversification, control.
Yes, gas is obviously the sector to be in. If you can get hold on Gazprom shares traded within Russia (not the GDRs in London), that might be a good idea in the long run, although the pending acquisition of Rosneft through a new stock issue might dilute the value of current shareholders (depending on the swap terms, of course). I used to be a Russian equities analyst, and sometimes I relapse into that mode. 🙂
One word can sum up why there will be huge investment into Russia in the coming decade: Gas.
They have more of it than anybody, and we needs it we does .