The recent episode of Russia's response to Georgia's military intervention in South Ossetia, and the response by the West just happened to occur about the time of my initial visit To Russia. Needless to say, despite having invested positions in Russia, many of my perceptions had been formed from the context of the cold war rhetoric of the past, current geopolitical rivalries, and whatever books and articles I could assimilate about the region, including an excellent one by the eminent scholar Marshall Goldman, Petrostate: Putin, Power, and the New Russia. I could not help but to have some trepidation about going to Russia during this time.
From a professional perpective, while in Russia, I had the good fortune to be able to meet and talk with people in Russia'a emerging financial planning profession; meet a well respected economist, an oil & energy analyst, an asset manager, and a managing director of Troika Dialog, a Russian investment bank; perhaps equivalent to a Russian Goldman Sachs. Additional meetings with the Lukoil State Pension Fund rounded out the opportunity to learn about, and understand better Russians, and their current political and economic environment.
From a personal perspective, I had the opportunity to have my education about Russian history deepened by at least half a dozen native guides, and visits to Russian cultural and arts venues. Looking back at approximately the past 100 years in Russia's history, I could not help being extremely impressed at the intelligence, resilience, and strength of the Russian people. Having gone through two revolutions taking it from a Tsarist empire to the communist country of the Soviet Union, two world wars during which in the Second World War estimates of up to 27 million Russian people died, including around 2 million in St. Petersburg alone, watching the communist state dissolve and re-emerge into a rudimentary democracy, and having it crumble economically around 10 years later, only to have it re-emerge as a economic, and strategic, geopolitical power on the world stage represents a remarkable testiment to the human spirit of resilience.
What also became apparent during my visit is how poorly it seems Russia and the West understand one another, as well as the fears generated by the threat of disturbing the global status quo.
As an investment advisor, my experience suggests to me that the recent decline in value in the Russian markets may be seriously undervaluing the investment potential of an emerging economic power that appears to be destined for an increasingly strong role in global affairs. This is not to imply that the risks are negligible with respect to these investments. Looking, however, at some of the fundamentals, such as Russia's extremely high literacy rate, a vast need for infrastructure development, the need to economically uplift the majority of Russia's population to an emerging middle class, and Russia's vast natural resource and energy assets, suggests a huge potential over the next 10-15 years.
Unless politicians allow themselves to become locked into a cycle of escalating adversarial rhetoric, increasing the possibility of misjudgement and miscalculation, Russia and the West will likely work out their issues into a new balance of power arrangement. This will likely not be a clearly delineated point, but rather an ongoing process with contributions from other major global players such as China. If this perpective is correct, the investment potential outcome may well warrant the assumption of some degree of the risk in these positions. At present, in particular, this period of crisis and declining Russian asset values may represent an opportunity to secure a piece of Russia's future prosperity.
About Me
- Ryan Darwish
- Geopolitical issues such as trade and fiscal deficits, resource supply and demand, and political and corporate malfeasance significantly influence the direction of global markets. I also happen to believe that much of the thinking on these subjects is the repetition of old story lines. As a consequence, public discourse on these subjects generally sheds very little real light on the issues of our day. In particular, my interests lie in identifying and clarifying the current and prospective risk and opportunity environment, as well as strategies for availing oneself of the opportunities and minimizing exposures to the risks. I am the author of The Emperor's Clothes: A Look at the Megatrends Affecting Your Financial and Investment Decisions. Published February 2007, this work accurately discussed much of what was to occur in global financial crisis of the following several years.
7 comments:
Well, today some of our major investment analysts in Russia have published an article, devoted to investments in Russian economy. They tend to assume Russian stocks are now greatly underestimated and they therefore suggest that it is, probably, a good opportunity to take part in the "sale" at the Russian stock market.
However, I think Russian economy is not yet strong enough to have zero correlation with the crisis in the world, so it will inevitably influence our market at least in the short-term period.
I would agree the the Russian economy has a fair degree of correlation with the rest of the global economy. In some respects, because of its dependence upon exports such as energy and other resources, perhaps more so than other some other countries.
A counterpoint, which might lessen some of this correlation to the current global slowdown is the continuing resilience of the Chna and Indian economies.
Additionally, one of the factors with which the governments of Russian, China, and India can stimulate thier domestic economies are funding needed infrastructure projects with some of the funds accumulated from exports. So far, I think one reluctance to doing this has been fear of feeding a higher than desired inflationary pressure.
Sure, but the inflation rate is above 15%. Our goverment is afraid of even higher inflation, which is why it is now trying to reduce its expenditure.
The thing is that capital assets in Russian industrial companies are depreciated and need to be replaced by the new ones. But replacement would mean new costs, which may also foster inflation.
At the same time our standard of living is not very high, and the government has to increase salaries in the state organizations, which inevitably leads to increase of inflation.
So everything we do causes even higher inflation..
At the same time our stock market is dropping down, and people prefer to spend and not to invest, and this means higher inflation. That seems to be a kind of a vicious circle.
Natalia-
Agreed that fear of further inflation is a factor constraining the economic stimulus of domestic infrastructure improvement projects.
One way the inflationary effect might have been dealt with would have been to preserve, and increase the strength of the ruble. Unfortunately, just the opposite seems to be occurring. In our current global risk averse environment the recent geopolitical disturbances in Russia have fed into investor fears. It seems to be encouraging a flight of capital out of Russia, and consequently, a diminished strength of the ruble.
Russia is not alone in tryng to manage a very challenging global economic climate. As you might be following events in the U.S., we are dealing with an institutional financial meltdown of probably epic proportions.
I think the key factor here is to try to maintain a mid to longer term perspective. There will probably be incredibly good opportunities emerging for those who have the clarity of vision, fortitude, and resources to make use of them. I would include Russia among these potential opportunities. Nothing, however, is for sure, and there are, and will be risks.
Ryan,,
true that one of the key factors of diminishing the inflation is strength of the national currency. However, this might be a bit tricky in today's reality.
My clients ask me which investment instruments to use to gain the possible income above inflation. Well, I'd say gold, real estate (but not in any country) and, perhaps, stocks, but a bit later, when the positive trend will be more obvious.
Natalia,
I would agree with you on gold. I'm not so keen on direct ownership of real estate in general because it has much less liquidity, and higher maintenance, and management issues. As an asset class, however, acquired at the right price, with the right cash flow, it can certainly be an inflation offset.
In the current economic environment of the U.S., Europe, and many other places, buying opportunities, as an inflation offset, may be emerging for real estate as a distressed asset class as global liquidity dries up.
I'm much more favorably predisposed to things such as energy, natural resources, food, etc. As a long-term investment stategy with these assets, it appears to be a situation of growing demand and diminishing supply, notwithstanding a current global economic slowdown.
I also try not to "fall in love" with any single investment, or asset class, as to contain the risk exposure. Limited percentage allocations, determined by a client's risk tolerance, to these various opportunities help in this regard.
Ryan,
True, falling in love with any particular asset may cause different problems.
However, there are very few people that use different assets to allocate their savings. They tend to use deposits of mutual funds that invest only in Russian stocks, and maybe Russian real estate. So our clients use only Russian assets, which means the level of risk for this kind of portfolio is high.
Now I'm trying to find relevant assets for my clients.
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