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Buy Russia When Oil is Cheap

If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (see below video). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties.

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After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom (OGZPF.PK) and Sberbank (SBRPF.PK), a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony against his boss, which he refused. A year later, the man died in prison from "natural causes."

The Russian government then seized Browder's operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country.

Browder, who is of Russian descent, and whose grandfather was chairman of the American Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks.

Despite all of the above, mega hedge fund Traxis Partners founder, Barton Biggs, says there is still a case to make for investment in Russia. It is the classic emerging middle class story. Russians have no credit card debt, no home mortgages, and terrible housing, but the resource wealth to buy what they need. Barton sees Russia eventually becoming a basic, functioning European country, but will first have to engineer a growth spurt to get there. That is the play. The principal vehicle for most foreigners to get into the land of Lenin and Red Square is to buy the ETF, (RSX), which was up 300% in 2009.

No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. But you run the risk of a knock on the door in the middle of the night.

By. Mad Hedge Fund Trader


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  • Anonymous on September 11 2010 said:
    Investing anywhere east of the Alps, or between the Alps and the Pacific is a risk greater than imnvesting in 'Atlantic' countries ie N. America and West Central Europe. Siberia/RFE is the last, greatest unexplored and unexploited wilderness on Earth. It is as big as 3 USAs put together, with resources to match. However about 1/3 lies under permafrost that is slowly melting. It is the most mosquito infested region on Earth (probably!). And you have to go through Moscow to get to it, investment wise. Is it worth the risk? Well, is China worth the risk? Is the ME with Iran looming large worth ther risk? Over the last 9 years all Eurasian investment has taken on a different aspect with new powers emerging. I guess investors will either have to limit the geoghraphy of their investments to where they feel comfortable, or learn to live with new investment climates and cultures...

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