Those that had invested in Russia over the past 10 years have ridden an even larger roller coaster than what we’ve experienced here in the US. Here is a snapshot of the broad Russian stock market index over the past 13 years or so:

  • stock market index value 67 in March 1996
  • 540 in Oct 1997 (you made 700% in 1.5 years)
  • 41 in Oct 1998 (you lost 92% in 1 year)
  • 670 in May 2005 (you made 1500% in 6.5 years)
  • 2452 in May 2008 (you made 260% in 3 years)
  • 512 in Feb 2009 (you lost 80% in 9 months)
  • 1096 in June 2009 (you made 114% in 4 months)

Where is it going for the next 1-2 years? Probably somewhere between 400 – 2000 (not very helpful insight). So you may lose half your money or double it. If the global recession drags-on causing the price of oil to fall, the Russian stock market will likely be closer to 400-600. If the reverse is true, we could see the Russian stock market go to the 1800 range.

Where is it going for the next 1-2 years? Probably somewhere between 400 – 2000 (not very helpful insight). So you may lose half your money or double it. If the global recession drags-on causing the price of oil to fall, the Russian stock market will likely be closer to 400-600. If the reverse is true, we could see the Russian stock market go to the 1800 range.

Clearly, if you were sure the global recession was over, Russia is where you’d park some of your money. But you’d better be sure, and you better be ready to pull the plug if your bet goes south!

The other main reason I don’t want to invest in Russia is the lack of support for shareholder (& in general, property) rights. The Russian economy is an oligarchy (ruled by a leader with a small group of powerful businessmen / ex-KGB supporters). The Russian central government has a history of taking over large businesses that it sees as profitable and core to the growth of the country.

Other notable points:

  • The global credit crunch is hurting Russian business greatly. Despite the central government spraying roubles and supporting its banking system, the business environment is dire. Default rates on business loans is expected to sky-rocket – but the central government’s records are not good enough for them to understand the scope of the pending failure.
  • Because the public have no faith in government nor the banking system they spend every penny they get. No one thinks in terms longer than 2 years ahead.
  • A lot of the money that rushed into Russia over the last decade took the form of loans, not equity. So Russian businesses are loaded with debt – in currencies that have gained value against the rouble (not good for those businesses).
  • Russia very skillfully managed a 30% depreciation in its currency in the past few months. This stopped a run on their banks.
  • Interest rates have been jacked-up to attract foreign investors – at a time when all other central banks are slashing rates to stimulate growth.
  • A crumbling infrastructure, extremely low productivity (26% of what American productivity is!!!!!), widespread corruption, an ageing population.

Long term (maybe even intermediate term – next 5-10 years), the system will fail, so buy & hold is a perilous strategy for Russia (would you have had the stomach to ride the losses shown in the bullets above?). That said, with huge volatility, there is an opportunity to make a large return if we wanted to gamble 3-5% of our money once we thought the global recovery was at hand. A sustainable global recovery will eventually drive the price of oil back up to $100 or more. This will doubtless cause the Russian stock market index to see the 1600-1800 level again in short order. Food for thought – and something I’m watching.

Added note: if you are a senior Russian central banker and you hold the world’s third largest reserves in US dollars & gold, when faced with a dire situation domestically, how much do you worry about damaging the US economy by selling US treasury bonds?  Yup. Probably not much. Are you concerned about the value of the US dollar and our ability to raise money by continuing to sell a $Trillion per year when key buyers have bigger fish to fry?  Russia also holds mountains of gold in reserve. As of late 2008, Russia now owns more reserve currency in Euros than the USD. They are wisely bailing on the US dollar before China, Japan, and the oil patch does. The first one out the door (selling out of US dollars) sees the least losses.