It seems to me that the investment community can’t quite make its mind up over Russia. One moment I’m reading positive things about the country’s growth prospects, the next I’m reading that its investment climate is worsening. I’m not too sure what, or whom to believe.
One thing that is for certain is that Russia will be hosting the World Cup in 2018 – much to the delight of Russia and the despair of the English. Not even a last minute plea from our very own three musketeers was enough to help a bid that had derailed long before they arrived on the scene. Apparently if you expose people for taking backhanders they don’t like it. Who knew?
So does hosting the World Cup make Russia a more attractive investment proposition? Or should the question really be: was Russia ever an attractive investment in the first place? In the week after it was announced that Russia’s bid had won, the Moscow Stock Index jumped 5 per cent, posting its biggest weekly rise in seven months. Early signs were positive.
I’ve read various articles saying that investors are now piling into Russian infrastructure stocks, with steel producers especially tipped to benefit as Russia starts building stadia, roads and hotels. I hear that Russian stocks trade around 6 times 2012 earnings compared to 10 times emerging stocks as a whole. Goldman Sachs is pretty bullish on the country that is more traditionally associated with the image of a bear. Jim O’Neill (the man that first coined the term ‘BRIC’ to define the four most exciting emerging economies; Brazil, India and China completing the quartet) of Goldman Sachs, points out that fellow commodity exporting BRIC country, Brazil, trades at much higher valuations while its currency, the Real, is more expensive than the Ruble. Baring Asset Managers were also able to see through the disappointment of England’s loss to Russia, reinforcing the positive sentiment. They believe that the win offers a better case for investing in the emerging giant, their view again being that an improved infrastructure and reputation that comes with hosting the Cup will have a positive impact on the economy.
So it seems as though investors should pile into Russia. One of the lauded BRIC economies, now with rights to host the 2018 World Cup. A perfect combo right?
Wrong. At least according to Peter Aven, Russian businessman, politician and president of Russia’s Alpha bank. Mr Aven said in an interview with the Financial Times at the beginning of this month that “there are so many emerging economies where people believe there is huge potential for growth, and the problem is Russia is not regarded as one of them by investors. That’s mainly because of the lack of competitive environment, corruption and the legal system which is not completely adequate. The level of investment is very low”. That doesn’t sound good.
Negativity too from JPMorgan who have failed to be inspired by the flood of new listed companies onto the Russian Stock Exchange this year. Despite multiple IPO’s in the Russian market throughout the year, Emily Whiting, client portfolio manager at JP Morgan Asset Management was pretty un-impressed. “New equity in the market hasn’t really created new investment opportunities because they are lower quality” she told What Investment.
Violent clashes between ultra-nationalists and migrants in Moscow this week also suggests that Russia has internal issues that it is struggling to contain. The cause of this disturbance, the biggest for almost a decade, was a reaction against police negligence over the death of a man who was killed in a brawl with migrants from Russia’s North Caucasus region in November. Or, more accurately, it was the temporary release of the suspected killers, by police who may have been bribed. Worrying signs perhaps for Russia, given that often racial hatred has a root cause in economic frustration. As a recent article on FT.com said: “with the economy stagnating, nationalism is a dangerous genie to let out of the bottle.”
Perhaps the future is not so rosy for our friends to the East then. Time will tell.