From time to time, I get asked about the outlook of Russian stocks in discussions with clients. I won’t invest in Russian equities (or Chinese stocks, for that matter) at the least while the current administration is in power. Still, I think it’s not such a bad idea to make an investment in them for people simply looking to make money or for immortals looking to invest for generations or centuries (although, of course, I wouldn’t recommend it during the current turmoil over Ukraine).
MVIS Russia index was strong until November last year, primarily due to the surge in oil and gas prices. However, after the Washington Post reported the mobilisation of Russian troops on the border of Ukraine, it plummeted due to risk aversion, most recently at 934.46, down over 20% from last year’s high.
Here, the positives of high resource prices are offset by the potential risk of sanctions by the U.S. and its allies. Still, the market (and Mr Putin) doesn’t seem to take the U.S’s threat at its face value. While the U.S. is threatening sanctions on par with those against Iran and North Korea, the market seems to be pricing in sanctions that are only moderately harsher than those imposed during the annexation of Crimea.
It is estimated that the hit Russia took from the sanctions on Crimea was 1.0-1.5% of its GDP, and Mr Putin was willing to sacrifice 1.0-1.5% of its GDP for Crimea. He will be OK with doubling it as long as it would bring Ukraine to its knees, restore Russia’s most important sphere of influence, keep him in power, and make his legacy. If there is a significant drop in stock prices in the military action, and if the sanctions are as meagre as the market and Putin expects, there will be a bet for Russian equities on the back of higher resources prices.
If the Russian military blitzes into Eastern Ukraine and forces Ukraine to accept Russia’s terms, this will be a huge victory for Putin and his cronies. At the same time, it will be a great misfortune for both Ukraine and Russia, and Mr Biden will be out. A horrible outcome is likely unless Mr Biden and Mr Blinken stop playing nice with their unreliable allies and take a firm stance, either alone or in concert with the British or willing countries. Or, Mr Biden may be preoccupied with Covid and the mid-term election and may end up forcing Ukraine to make significant compromises to avoid a major crisis. In any case, unless Mr Biden tries very hard, Mr Putin seems to have the upper hand.
For the past ten years or more, Mr Putin has been simply trying to “bring back Great Russia” – a voodoo campaign to invoke the ghost of a nationalist leviathan that has been sleeping in the dust in the storeroom for years.
The Leviathan’s behavioural principle is endless self-aggrandisement, both internally and externally. Thus the scope of power of the states has been expanded, rights of people restricted internally. At the same time, the restoration of the sphere of influence has been sought. Its raison d’etre is security against threats from within and outside, i.e. security against “foreign agents” such as Navalny and Memorial trying to topple the regime and the United States, NATO, and other rogue Western powers that are after Russia’s resources.
For Leviathan, elections and capitalism are all means of self-enrichment, so elections become a put-up job where those who suit him win. Capitalism becomes crony capitalism in which sectors and corporations that serves the cronies flourish. All this does not bode well for a sound investment, no matter what Jim Rogers or Marc Faber says.
I know some of you may be angry by now and say, “After writing all this, what good about investment in Russia over centuries?”
The first thing to remember is that Mr Putin is not immortal. There is no guarantee that the next one will be better, but it is hard to find a leader who is so powerful, badass, and dangerous. Mr Putin is more of a one-man-shop compared to the Chinese Communist Party. (Recall that when Medvedev was in charge, the rogue trio of Hillary, Cameron, and Sarkozy used UN resolutions as a shield to seize command of the air over Libya and topple Gaddafi. (Mr Putin was in a nasty mood then).
Russia has not only vast natural resources but also quality human resources. The level of education of the general population is among the highest in the OECD. The country can become a technology powerhouse once the distorted allocation of resources by the state and its cronies is eliminated (in fact, the whole industry was a little hot when Kaspersky, VK, etc., first appeared on the scene). It’s also great in the arts and would be a great soft power once it is free from all the propaganda nonsense for Leviathan.
Above all (and this is also true of China), the current media coverage is unusually negatively biased towards Russia. As mentioned above, there are legitimate reasons for this, but they are significantly undervalued compared to what they are. There will be considerable upside just by getting this back to normal. In the early days of the BRIC and other emerging economies boom, I had discussions on the most promising region with many business people in Europe (when Putin was not yet such a warmonger). Many of them mentioned Russia as a bright spot then.
It seems unlikely that Putin’s regime will end peacefully. The Russian empire, the Soviet Union, has not ended well, and Russians, like the Japanese, tend to be curiously self-destructive. I suspect that they are utterly incapable of creating a sane political system. However, these people defeated Napoleon and Hitler and gave birth to Tchaikovsky and Tolstoy, despite notoriously incompetent leaders and a crappy governing system. I will definitely invest some money in the country if it becomes a little more normal and won’t poison Navalny anymore.