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Russia: missed opportunities

Russia remains a land of opportunity for investors” reads the title of a comment piece in Tuesday’s Financial Times. It surmises many of the opinions I have already discussed on my blog about the misconceptions of the Russian investment climate. The author, Chris Weafer, has long been on the side of Russian investment and I would encourage you to read his contributions to the blog Russia other points of view to see how he is fighting to promote a more positive perception of Russia. 

Weafer’s stance stands apart from the sea of articles about Russia at the moment that are less than favourable to say the least. Events in Ukraine escalated apprehension of doing business with ex-Soviet countries, as businesses are concerned by both the geopolitical and economic situation. I remember I was bemused – and dismayed – to read shocked news reports in mid-March: how could the Italian tyre giant Pirelli & Co have gone through with the almost $7 billion investment deal with Russian oil company Rosneft?! Yet, long before these recent events, I was trying to counter this incredulity amongst investors that it’s possible and, more importantly, profitable to invest in Russia.

Weafer notes, “Russia needs to restore the confidence of investors, domestic and foreign alike”. This reminded me of a report printed in the Russian economics newspaper, RBK Daily, only the day before. It discussed the growing trend amongst Russian corporations, including the likes of Sberbank and Alfagroup, of diversifying their portfolios by establishing foreign trust funds.

Of course, there is financial rationale behind the globalisation of Russian funds, so-called “Westernisation”, but I question whether it needs to involve a mandatory rejection of the Russian investment market. As the RBK article highlights, rather than invest in Russia, these “newfangled funds” are putting shareholders’ money in ever expanding and ever more expensive Western stocks. This is imprudent in the current climate when analysts warn of an imminent correction or even collapse of the US stock market; this would not be good for generating profit.

Furthermore, Weafer argues by ignoring the Russian market companies will miss many “lucrative” investment opportunities. He makes two key points which I have always advocated about Russia:

  1. contrary to popular opinion, the Russian economy is not dependent on oil and gas alone. Other sectors in Russian now offer the dynamism, opportunities and profitability, and as such the percentage contribution of oil and gas to Russian tax revenues has decreased;
  2. the emerging middle class is vital, as whilst their outlooks and horizons expand, so does the size of their wallets! We are discussing a country whose middle class, according to McKinsey, tripled between 2007 and 2012. 68% of Russia is middle class. Compare this to the Chinese figure where the middle class surmounts to just 13% of the population. As I have previously blogged, over the past decade, Goldman Sachs Special Situations Group is gaining notoriety for ‘bitesize’ private equity deals in Russia and the CIS, as it seeks to profit from this growing sector of Russian society, who continue spending despite any economic slowdown.

But Goldman Sachs SSG is one of the few who is prepared to listen. It only takes a cursory look at the comments on the Financial Times article to understand this is currently not a viewpoint most people are prepared to believe. Weafer and I obviously have a lot more writing and convincing to do!

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