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Is Russia worth the risk?

Moscow Russia Skyline Buildings 480

Russia has finally joined the World Trade Organisation, prompting many to question whether now is the time to invest in the former superpower.

In August, Russia joined the WTO after 18 years of negotiations. As a result, import duties will fall and export duties will be limited, while European companies will have greater access to the domestic market. Russia should also benefit from increased foreign investment.

HSBC manager Douglas Helfer, who runs the £336m HSBC Russia Equity Fund, says he expects a sharp rise in foreign direct investment into Russia, a trend seen in China after it joined the WTO.

Helfer says: “Valuations have been depressed based on changes in oil price, geopolitical issues and the perception of political and corporate issues. Many of these issues have either improved or remained the same and do not completely justify the significant valuation discount.

“With March’s presidential elections out of the way, political risk has subsided. President Vladimir Putin seems committed to shift from an export-driven strategy to a strategy focused on new investments, increases in productivity and the introduction of new innovations.”

Helfer says the market is looking for Putin’s ability to deliver on this strategy to maintain growth.

Russia has seen recent financial market reforms which are expected to boost the economy. Last week, a central securities depository was established anda so-called t+n settlement was launched, which will allow market participants to settle trades within two or three days, according to European and UK standards, as opposed to a policy of same-day settlement.

Jupiter fund manager Elena Shaftan, who runs the £272m Jupiter Emerging European Opportunities fund, believes these policies are beneficial for Russia.

She says: “Whilst investors complain loudly about a lack of reforms, the financial market reform is going ahead and a central securities depository has been established.

“Although it is going to take a few months to implement it fully, it will open the Russian market to all investment funds and will drive down the local share price discount.”

Shaftan believes there is potential for a re-rating in the Russian market, saying: “Russia is the cheapest market in the world, trading at 5 times price to earnings. When it is going to re-rate we do not know, but there is enough in the mix to justify it.”

Chelsea Financial Services head of research Juliet Schooling Latter says there are risks like poor corporate governance and corruption, but the Russian stock market is trading at depressed levels.

She says: “The fundamental thing is the risks are baked into the price. The Russian market is very dependent on oil. The Russia bears will say that if the oil price goes up, the government will just tax the oil companies more anyway, which is where the political risk comes in. You can make a lot of money through investing in the Russian market, but it is highly volatile due to the risks there.”

Chelsea favours exposure to Russia though the £380m Neptune Russia fund, managed by Robin Geffen.

She says: “Geffen has been investing in Russia for many years and knows the market well. He has done very well with that fund.”

Eastern European Trust analyst David Reid says many sectors stand to benefit from Russia’s move to join the WTO.

He says: “Many export industries where Russia has a competitive advantage, such as steel and chemicals, will have easier access to foreign markets previously restricted by quotas and tariffs. They will also benefit through having better access to imported goods, services and investment.

“The consumer sector will also benefit from higher employment and wages as foreign investment in the economy takes effect.

“But there will be a handful of areas, such as some agriculture and auto manufacturing, that have to adjust to the steady reduction of protectionist measures. The companies that come out of this process will be stronger and leaner than they are today.”

Reid says Russia is trading at historic lows compared to other emerging markets despite the fact that the economy has been growing since the 2009 financial crisis and has achieved record low inflation and unemployment levels this year.

Reid says: “On a price to earnings basis, Russia is close to record lows in absolute terms and also relative to its own history and to GEM peer markets. So there is every potential for re-rating.

“One factor that is likely to help is that Russia’s dividend yield now exceeds the GEM average. This is due both to low valuations and dramatically improving payout ratios.”

Bestinvest managing director of business development and communications Jason Hollands says Russia funds are not suitable for most investors.

He says: “Investing in Russia is fundamentally a big play on oil and gas, but overlaid with the additional risks of poor corporate governance and at times heavy political interference. For most investors, a Russia specific fund is going to be way too risky and it will be more appropriate to access the market through a global emerging market fund.”


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