Risks of rushing back to Russia

FT.com

Oil prices are on the rise and suddenly it’s time to make sure you’re on the investment train to Russia again. And, despite a continued perception of higher risks associated with investing in the country, the early birds are already there, as a report in Monday’s FTfm explains.

While emerging market funds in general have seen big net outflows this year, according to EPFR, a global fund flow data provider, fund flows into Russia have been picking up. Russia-focused funds have gathered a total of $1.22bn in the year to date, against outflows of $2bn for China and $980m for India in the same period, EPFR data show.

Brad Durham, EPFR managing director says the enthusiasm for Russia “is due to rising oil prices and Russia’s exposure to the energy sector, and attractive valuation”.

Plamen Monovski, chief investment officer at Renaissance Asset Managers, part of Moscow-based Renaissance Group, also thinks it is a good time to add Russia to an investment portfolio.

“People will be buying into things that are very cheap. And Russia is the cheapest large market out there,” he says.

Prudent investors might want to pause, however, and consider why so many pulled out of Russian investments in the first place. An FT report at the end of last year detailed capital outflows totalling $3bn per week.

Yevgeny Gavrilenkov of Troika Dialog, the Moscow investment bank, when interviewed at the time, suggested the acceleration in outflows might have been due to fears that infighting between political and business elites could get worse.

“This is part of Russia’s Byzantine reality which does not attract investors,” he said.

Bill Browder, founder of Hermitage Capital Management, a specialist emerging fund manager and once one of Russia’s biggest portfolio investors, seems to think that Byzantine reality is still a factor of the moment.

“In Russia, any company may lose its assets or cash flow at any time to criminals or competitors without any recourse,” he says.

London-based Mr Browder says this makes it difficult to estimate the future value of an equity investment. “You have to apply a large discount but what is the right discount?” He ranks Russia in the same risk category as Iran or Venezuela and would apply “similar big discounts”.

Mr Browder, who was banned from entering Russia in 2005 after alleging corruption at big Russian companies, is pressing the European Union and the US for visa bans on Russian officials he accuses of complicity in the death in prison of his lawyer, Sergei Magnitsky, two years ago.

And, if the ‘Byzantine’ risks were not enough to discourage investors, Russia’s dependence on natural resources, notably oil and minerals, should also be given some consideration.

“When you buy Russia you have to take a view on what commodities will do,” says Hugo Bain, a Russia investment manager at Pictet Asset Management.

If investors can put aside all those concerns, however, the investment trains to Russia are leaving all the time and most seats are taken.
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